The new management of Babcock International (LSE:BAB) PLC have “a credible turnaround plan” and disposals will help strengthen the defence firm’s balance sheet, according to analysts at JP Morgan.
In a note on Tuesday, the bank upped its target price for the FTSE 250 group to 400p from 350p and retained their ‘overweight’ rating, saying the company’s plans to raise over £400mln over the next 12 months through the sale of five businesses as well as improve its earnings (EBITA) margins to around 9% in the medium-term will cause “short-term pain” but in the long-term will provide gains for the business.
READ: Babcock shares tumble on losses and cautious outlook
“[Babcock’s] new mgmt team wants to bring year-end net debt and avg net debt back into line by ending the former practice of temporarily squeezing working capital at period end. This will require an unwind of working capital of c£200-250mln; we had expected this to be over three years but we now expect it to be over two years and quite front-end loaded. By taking this pain upfront we expect BAB to achieve operating cash conversion of c90% by [the end of March 2024]”, analysts said.
Shares in Babcock jumped 2.8% to 295.4p in early afternoon trading.