Babcock International (BAB) 401.4p

Gain to date: 22.1% 

Original BUY @ 328.8p on 16 March 2023

We highlighted the FTSE 250 company was at the start of a major recovery under chief executive David Lockwood and chief financial officer David Mellors, who together successfully turned round defence outfit Cobham before its £4 billion sale to US private equity firm Advent in 2020.

An increase in geopolitical tensions continues to provide a constructive backdrop for Babcock which is a big supplier to the UK and international partners.

WHAT HAS HAPPENED SINCE WE SAID TO BUY?

Full-year results to the end of March came in better than expected with revenue up 10% and underlying operating profit climbing almost 17% to £278 million.

‘When we started our transformation, my first goal was to stabilise and strengthen the balance sheet and I’m delighted to say that work is complete,’ said Lockwood.

‘Babcock is now a higher-quality, lower-risk and more predictable business, with a clear focus on execution.’

The company also resumed dividend payments after a four-year hiatus, reflecting its confident outlook based on a growing order book and scope for further margin expansion.

Positive momentum has continued to build with first half operating profit to the end of September rising 27% to £154 million, beating analysts’ expectations. Profit was boosted by earlier than anticipated license income from a Polish frigate programme.

The company stuck to its full year guidance and said the global threat environment continues to drive demand for defence equipment and maintenance work.

Over the medium term, Babcock is aiming to deliver average underlying operating cash conversion of at least 80%, an operating margin of more than 8% and average annual revenue growth in mid-single digits.

WHAT SHOULD INVESTORS DO NOW?

With the turnaround programme still in its early stages and global tensions remaining front and centre, Shares believes Babcock remains a compelling opportunity.

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