Swinging to a pre-tax profit of £182.3m for the year to 31st March 2022 from a pre-tax loss of £1.81bn reported in the previous year demonstrates without doubt that Babcock International is not only on the mend but is now moving forward into a period of growth. While there remains more work to be done, the future is bright and the opportunities that this fascinating aerospace, defence and nuclear engineering company has are potentially formidable.
FY22 revenue at Babcock International rose to £4.1bn and the order backlog jumped 21% to £9.9bn. CEO David Lockwood said in the statement that:
“As we continue to make further operational progress through the disciplined execution of our strategy, the board is confident of delivering on its expectations of increasingly profitable growth and improved cash flow for fiscal 2023 and into the medium term.”
Without doubt in my view, the FY22 results demonstrate that Babcock International has not only done what it told investors it would do following what had been an exceptionally difficult year that required significant write downs, but has achieved even more benefits than it had promised.
In short, the portfolio of Babcock International interests has been simplified through a range of disposals and it is by achieving this and rewriting the business model that has allowed the company to refocus on important and potentially more lucrative chosen markets.
In the process the quality of the balance sheet has been significantly improved and strengthened and as alluded above, improved efficiencies have been driven through as the new operating model has been implemented.
Babcock has also continued to invest in its processes, facilities, people and systems and in doing so, has in my view lowered the platform of risk on which it can potentially win future business. The bottom line to all this is that Babcock International has been able to drive increasingly profitable growth and looks to be very much better placed as it moves into the future.
During the year the company has received over £400m from completed disposals and three weeks ago the company announced that it has agreed to sell part of its Aerial Emergency medical, firefighting and search and rescue helicopters business in Italy, Spain, Portugal, Norway, Sweden and Finland for £115m but would retain its aerial emergency services businesses in the UK, France, Canada and Australia where it also operates in defence sectors. Total proceeds from disposals policy announced a year ago are anticipated to be in the region of £560 million when completed with the addition of £340 million of leases having been transferred. In the meantime, net debt at FY22 year end was £969 million, a substantial improvement on the figure a year earlier.
Babcock International operates in Marine, Nuclear, Land and Aviation and while the restructuring plan is not yet fully complete the company started the current year in a dramatically improved place than it has the previous year.
Another important factor is that, as a people centric business in manufacturing and service sectors, Babcock secured deals with its trade unions early.
There can in my view be little if any doubt that words expressed a year ago have been turned into deeds and that no time has been lost in taking the subsequent actions that would, as part of the overall plan, be required.
Another important point that I would add and one that that I have talked on before, is that year ago Babcock International was not in a good place in regard of its relations with the UK MOD customer. Today I would say that the reverse is true and that because of the actions it has taken, improved governance, management and responsibility, Babcock International is in a very good place in respect of relations with the MOD and indeed, other international customers.
The current year, the second of its turnaround plan, will build on the strategic actions taken last year. The focus this year will be execution and growth and will include further restructuring benefit. The disciplined manner in which Babcock has conducted and delivered on its expectations is to be commended and the outlook for increasingly profitable growth and improved cash flow for FY234 and into the medium term should not be lost on the investment community.
As the company looks forward to the future with its naval engineering support and systems, civil nuclear, critical defence and civil services, land and aviation businesses, the portfolio of interests that the company now has provides the stability that it needs to progress. The promised portfolio re-alignment has been delivered, operating model changed to one that focusses on improving customer delivery and risk management, deriving of more efficiencies from shared functions and the embedding of the new operating model in order to drive sustainable business improvement.
None of the above has stopped continued investment in controls, systems and process improvements. A people strategy based on agile working, harmonising policies and processes, promoting of collaboration wherever possible – the bottom line is that over the past year Babcock has gone through a much-needed culture transformation.
In summary, under CEO David Lockwood and CFO David Mellors, Babcock International has delivered what it said it would do – simplified the portfolio, strengthened and improved the quality of the balance sheet, driven efficiencies through implementation of a new operating model, invested in processes, facilities, people and systems and placed itself on a much lower risk platform from which to win new business.
Type 31 frigate which Babcock is building for the Royal Navy, Arrowhead 140 frigate design and which the company has already won orders from Poland, Indonesia and that the company is pitching to the MOD as a potential competitor for the Type 32 bode well as do the majority of other activities within the Babcock portfolio.
CHW (London – 28th July 2022)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785