viewBabcock International

Babcock fires blank on dividend but says demand remains resilient

Efficiency and profits were hit as coronavirus-related safety constraints were brought in, including restricted access to customer sites, safety measures and reduced numbers of staff on site

Babcock International -

Babcock International Group PLC (LON:BAB) will not pay a dividend for the past year after underlying profits fell 40% in the past quarter but work continued on its key contracts and demand in critical areas remained resilient.

The defence contractor said underlying revenue in what was the first quarter of its new financial year was down 11% on last year but that revenue from its ‘core business’ grew slightly.

Orders of £0.7bn were taken in the three months to June 30 and in July the FTSE 250 company secured around £500mln of new contracts in its aviation business as it said delays in bid decisions were “beginning to clear”.

Efficiency and profits were reduced as coronavirus-related safety constraints were brought in, including restricted access to customer sites, safety measures, reduced numbers of staff on site, changed shift patterns and additional costs. 

“These have led to slower progress on some work streams which has impacted margins on some of our long term contracts in the quarter,” the group said.

Half of the profit reduction in the quarter was related to South Africa and the absence of Magnox contract after it came to an end, with the rest to the core business.

Having a month ago put off the decision on whether or not to pay a dividend for the preceding financial year, Babcock said: “After careful consideration the board has made an exceptional decision not to pay a final dividend for the financial year ended 31 March 2020, given the continued uncertainty around the outturn for this financial year.”

It said this supported its strategy of continuing to reduce net debt and was an “appropriate” decision given the group's use of the UK government's coronavirus furlough scheme.

Broker Liberum said it was not surprising that COVID has resulted in some delays, with lower profits only being recognised when milestones are reached. 

“It may be possible to catch up on the productivity, which would clearly be positive for margins later in the contracts.”

Analysts noted that the South African equipment business has been weak in the quarter but is seeing some order book improvement, with the two weakest areas being civil training and airports.

Babcock shares fell 12% to 255.1p by mid-morning on Tuesday.

Weighing on the shares were price target cuts from JPMorgan Cazenove, to 308p from 516p, and from Jefferies, which moved to 430p from 520p but kept its 'buy' rating.

Quick facts: Babcock International

Price: 225.4 GBX

Market: LSE
Market Cap: £1.14 billion

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