Babcock set to cash in on government ‘outsourcing’ work

Defence and engineering contractor Babcock International has predicted a strong performance for the current year as it benefits from government moves to cut costs by farming out work to the private sector.

The group, which owns the Rosyth dockyard and manages the Clyde naval base, said its order book and pipeline of contract bids had remained stable at around £13 billion each during the first half and it was confident of meeting expectations for the full year.

It told investors: “Our businesses continue to experience buoyant market conditions, in both civil and military markets, as current and potential customers continue to seek increased efficiency and improved availability of assets.

“This is driving further opportunities for the group, where we can benefit from our market-leading positions and our track record of delivering efficiencies for our customers.”

Shares in Babcock rose 22.5p, or 2.4 per cent, to 945p following yesterday’s trading update. It is due to release its first-half results early next month.

Seymour Pierce analyst Kevin Lapwood said the group’s shares have outperformed the market by more than 26 per cent over the past 12 months, and he expects that trend to continue.

He added: “We believe the need to significantly reduce the defence budget, without any significant scope to further reduce capability, will inevitably lead to more outsourcing to proven operators like Babcock.”

Peel Hunt analyst Christopher Bamberry, who rates the group’s shares as a “buy”, said the update was in line with forecasts, adding: “Over the medium term, we continue to see the scope for profit upgrades.”

Babcock acquired rival defence services firm VT for £1.3bn in 2010, and the group had said it expects to generate £50 million of savings a year through the deal, and Bamberry said there was the potential for even higher merger benefits.

Combined with steps to tackle the group’s debt pile – £641.1m at the end of last year – that could deliver underlying earnings growth of between 15 and 20 per cent, he said.

Analysts expect pre-tax profit of around £314m for the year to the end of March 2013, up from £274.1m the previous year.

Along with its defence work, which includes the maintenance of Royal Navy submarines, Babcock is part of a consortium working on the decommissioning of the Dounreay nuclear plant in Caithness.

The group said yesterday that it has identified a range of new opportunities in the civil and military sectors, and it had its eye on “significant” defence equipment and training support deals that it expects to become available over the next two years.

Investec analyst John Lawson said: “Babcock remains extremely well positioned, given its highly-skilled workforce and a strong pipeline of new business opportunities. Furthermore, it is tracking some significant longer-term work that could come to the market in the next 12 to 24 months.”