Babcock on observe to hit medium-term steering

Babcock said it is making progress towards achieving medium-term guidance on Friday, as higher global defence spending continues to drive profit growth.

The defence contractor aims to score mid-single digits annual average sales growth, a minimum 8 per cent underlying operating margin and an underlying operating cash conversion of at least 80 per cent.

In the year ending March 2024, the company’s turnover flatlined at £4.4billion but rose by 11 per cent on an organic basis thanks to good results by its land and nuclear divisions.

Outlook: Babcock said it was making progress towards achieving its medium-term guidance

Babcock said trading in the former segment was boosted by vehicle engineering contracts, a major deal with the Australian Defence Force, and demand for mining equipment at its South African business.

Meanwhile, the group’s nuclear arm saw revenue jump by 29 per cent to £1.5billion on the back of new contracts in its civil nuclear business and for work on nuclear submarines.

Last November, Babcock won a £750million deal to deliver infrastructure upgrades at the Devonport naval base in Plymouth to support the Royal Navy’s Astute Class submarines.

Since then, it has gained contracts to refit HMS Victorious, support air ambulance operations in Victoria, Australia, and was selected by Saab to help design ships for the Swedish Navy. 

By the end of March, the FTSE 250 group had increased its contract backlog by 9 per cent to £10.3billion.

Defence companies like Babcock are benefiting from governments boosting military spending in response to conflicts and heightened tensions across Asia, the Middle East, and Eastern Europe.

Total global defence expenditure rose by 7 per cent to a record $2.4trillion last year, the steepest annual increase since 2009, according to the Stockholm International Peace Research Institute.

David Lockwood, chief executive of Babcock, said his company ‘is well-positioned to benefit from the sustained uplift in global defence budgets, driven by the need to recapitalise, re-equip and modernise militaries.’

He added: ‘We combine strong engineering know-how, high customer intimacy and extensive operational asset knowledge together with highly collaborative relationships and product development capability.’

Babcock also saw underlying operating profits soar by about a third to £238million last year, despite the firm taking a £100million loss on a 2019 deal to build five Type 31 general-purpose frigates for the Royal Navy.

In addition, the company restarted dividend payments following a four-year hiatus, and its underlying free cash flow more than doubled from £75million to £160million.

Babcock International Group shares were 1.85 per cent up at 496.8p on Friday morning and have risen by around 23 per cent over the past year.