ii view: Babcock restarts recovery after AirTanker sale

A transformation at this aerospace, defence and security group is ongoing. We assess prospects.

Business stake sale

ii round-up:

Engineering and defence company Babcock International (LSE:BAB) today announced the sale of its 15.4% stake in the Royal Air Force’s fleet of Voyager inflight air-to-air refuelling aircraft and military transportation planes.

The sale of its AirTanker Holdings stake will raise a net £95 million and leaves Babcock, pending sale completions, achieving its targeted minimum of £400 million of business disposals in the current financial year to March 2022.  

Babcock shares rose by more than 3% in UK trading, bringing their gain year-to-date to more than a quarter. Shares for fellow AirTanker Holdings partner Rolls-Royce (LSE:RR.) are down by around 1% in 2021. 

Rolls-Royce is also selling its 23.1% stake in AirTanker holdings to Equitix Investment Management Limited: a City infrastructure investment firm. Airbus (EURONEXT:AIR) and Thales are further stake owners in AirTanker. 

Weekend press speculation also flagged a potential break-up of Babcock’s helicopter business and sale of its helicopter services unit as a possible business disposal.

Babcock retains its 23.5% shareholding in AirTanker Services Limited, which operates the 14 A330 Voyager aircraft. 

Full-year results to the 31 March 2021 saw Babcock reporting a headline loss of £1.64 billion as it took £2 billion in contract impairments and charges. Net debt at the end of March excluding operating leases came in at £772 million, down from over a billion in the prior financial year. 

ii view:

The critical and complex engineering services provider delivers its services across the four arenas of marine, land, aviation and nuclear. Along with servicing marine warships and nuclear submarines, it also supports land vehicle fleets such as those of the British army and Met police. Its aviation business includes the now spend thrifty oil and gas industry which has been busy reducing services to offshore facilities.  

Under its current chief executive, since  September 2020, it has been busy reducing its complexity, increasing its focus, and improving its profitability and cash generation over the medium term. Annualised costs savings of around £40 million are being targeted, with growth opportunities evaluated, including opportunities in international markets and through its range of products. 

For investors, the Covid crisis has proved tough for Babcock. Virus challenges and inefficiencies have arisen due to the often  close working proximity of its staff on ships and submarines. Significant charges have pushed it into a loss and the dividend payment remains halted. 

That said, sizeable action by the CEO has been taken, including a targeted minimum of £400 million of business sales in the current financial year. Cost savings are in management’s sights and a previously rejected merger proposal from Serco Group (LSE:SRP) should also not be forgotten. In all, while some caution remains sensible, tentative reasons for longer-term optimism continue to emerge. 

Positives: 

• Reducing complexity and increasing focus
• Targeting cost savings

Negatives:

• High Covid operational challenges
• Dividend suspended

The average rating of stock market analysts:

‘Buy’