RBC Capital Markets blighted shares in Babcock International PLC (LON:BAB) on Monday after the Canadian bank cut its stance on the engineering group to 'sector perform' from 'outperform' with 'speculative risk'.
The bank also chopped back its target price for the FTSE 250-listed stock back to 700p from 1,000p, with the shares currently trading at 584.60p, down 5.5% on Friday’s close.
READ: Babcock says trading is in line with expectations, outlook unchanged
In a note to clients, RBC analysts said that while its market-leading position, high barriers to entry and a long-dated order book should make Babcock an interesting investment proposition, it's telling that there's limited buying interest even on a 2019 price-to-earnings ratio of eight times.
They said that its positive stance had been based on the strength of the group's relationship with the UK Ministry of Defence, the non-discretionary bias of the work it undertakes and the fact that these were not reflected in its rating.
"However,” the analysts added, “persistent 'financial discipline' concerns and negative earnings surprises have ensured that the stock de-rating has continued. Putting this into perspective, Babcock has now underperformed the FTSE All Share 50% over the past five years - despite an 11% compound annual growth in operating profits. On this basis, surely something has to give?"
They said the stock's low valuation appears to reflect worries that the issues that have beset the likes of Capita, Carillion, Mitie and Serco - growth, accounting and balance sheet - are about to emerge at Babcock.
The analysts concluded: "In our view, until we see both the board and outlook 'refreshed', it is difficult to envisage relative outperformance.”