Babcock shares extend 11-week gains to 35%

A rebound is already impressive, but the dividend is attractive and the shares cheap, on paper at least.

A buoyant few weeks for Babcock International (LSE:BAB) continued today in the wake of its headline-grabbing £1.3 billion order for a fleet of frigates for the Royal Navy.

The latest boost for Babcock investors came as the aerospace and defence company confirmed that trading since April had met expectations, with revenues, operating profit and free cash flow all performing in line with guidance set out in May.

That's a significant moment for a FTSE 250 index stock that until this summer had been on a five-year downward spiral from 1,300p to a low of around 410p in May. The shares are now trading at 565p, including an improvement of 4% after today's update.

Source: TradingView Past performance is not a guide to future performance

While annual results published at the end of May were poorly received amid weaker profits and a disappointing outlook, a series of factors have underpinned the share price since then.

The company's capital markets day in June was particularly significant, having set out a plan for medium term growth by focusing on its three markets with the strongest leadership positions - defence, emergency services and civil nuclear. Babcock believes it can generate 85% of its revenues from these markets, compared with 75% currently.

Babcock is the UK's second biggest defence supplier, with the new HMS Queen Elizabeth aircraft carrier among recent high-profile joint venture contracts. However, it also sees longer-term potential from an established defence presence in Canada, Australia, New Zealand and France. 

In emergency services, Babcock is Europe's leading provider of aerial firefighting and medical services. The civil nuclear division supports the majority of UK decommissioning projects, such as Magnox reactors, as well as the country's nuclear submarines and infrastructure.

During investor roadshows to support this strategy, Babcock shares were given a lift by the disclosure that Serco had tabled a merger proposal in January. Babcock dismissed the approach at the time as "having no strategic merit".

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Today's update shows that trading across Babcock's various divisions since then has been in line with expectations, with the added boost of preferred bidder status for the Type 31 frigate programme. Prime Minister Boris Johnson said the award would "bring shipbuilding home".

The five ships will be assembled at Babcock's Rosyth facility in Fife, supporting an estimated 2,500 jobs as work is expected to begin imminently to deliver the first ship by 2023.

The order at the start of September helped accelerate Babcock's share price recovery, with the stock now close to its highest level this year. Analysts at Liberum, who have been long-time supporters of Babcock, currently have a "buy" recommendation and 720p price target.

Shares were trading as high 1,000p in early 2016, before a series of downgrades to consensus forecasts left the stock at its lowest point since 2011 and a target for speculators, particularly in light of the uncertainty facing the wider outsourcing sector.

Babcock also had to deal with the fall-out from criticism of its performance contained in research put out by an anonymous group called Boatman Capital Research. Babcock said the claims that it had a poor relationship with the Ministry of Defence were not true.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.