After a torrid few week let alone past year in respect of dismal share price performance Babcock International presented investors with three quite fundamental messages in its half year results today – improved cash flow and margin improvement, interim dividend up by 3.6%, £159 million decrease in net debt and, after a decade and more of good growth, a continuing excellent outlook.
The £120 million write down on the company’s involvement in decommissioning of the ten Magnox nuclear power stations plus two test sites and for which early termination in August 2019 was signaled more than eighteen months ago due to flawed procurement processes with no reflection of Babcock performance (a fact that is fully supported by the National Decommissioning Agency [DMA] should in my view be taken as a sensible and practical last case scenario that, for all the right reasons, ignores future available potential.
Babcock International continues to do well across all four of the Marine, Land, Aviation and Cavendish Nuclear activities in which it engages. The company has a very strong order book of £18 billion with 92% of FY19 and 60% of FY20 revenue secured. What is there not to like with a company that, despite spurious unfounded and supported comments to the contrary, not only has the full backing and support of its main UK prime customer, the MOD but also for the many other customers the company has at home and abroad.
Babcock International management is also showing that it continues to be adaptable to change with the various businesses that the company has chosen to exit. These include media services, renewables, North American mining and construction support and the South African powerlines business which as far as I am aware is the last business activity that remained from the pre 1988 Babcock International business. Having announced the intended closure of the Appledore shipyard business and an end to the leasing of the site in March 2019 when this ends, the premature end next year of the Magnox decommissioning contract and suffered issues related to the grounding of its fleet of 13 EC225 Super Puma helicopters following a tragic incident involving an aircraft of this type in Norway in 2016 it is hardly surprising that the company would take an asset impairment charge of £38m in order to reduce oil and gas related assets of the eight aircraft owned to their correct market value and also recognised a £42m onerous lease provision which reflects the cost of assets leased versus their actual value. Babcock have stated very clearly that the 13 Super Puma helicopters that they either own or lease will be sold or repurposed – one of which has I understand already been repurposed for use in firefighting in Spain.
Of the close to £120 million of exceptional costs announced in the interim results the company has stated very clearly that the overall charge would only result in a £10m net cost due to tax effects and proceeds from the disposal of assets.
True, the company was quite clear in conceding its belief that the oil and gas business continues to be impacted by “challenging industry conditions” to service in the North Sea due workers having a lack of confidence in its safety and that action is being taken. The company predominantly serves the UK North Sea and Australia with about 50 helicopters, 10% of its total aviation fleet, in support. Nevertheless, even though times are hard it should not be forgotten that this business activity has a long tradition of being either feast or famine.
The bottom line was very well put by CEO Archie Bethel in the statement when he said that “We are taking actions necessary to further improve the quality of our earnings and our returns to shareholders. That is why we are exiting low-margin businesses, restructuring in areas and combating the overcapacity in our oil and gas helicopter services business”.
Finally, to those trying to do this company down for their own purposes and who attempt to claim that Babcock International has problems with its domestic MOD customer I would remind that the company is a signatory of the ‘Joint Ways of Working’ Charter and a hugely respected strategic partner of the UK Government and MOD. Underlying operating profit improvement combined with margin, cash flow and net debt improvement together with the MOD having come out in full support of Babcock International against spurious and damaging comments say it all. This is a company going up rather than down and the 30% plus fall in share price over the past year could quickly reverse.
CHW (London – 21st November 2018)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785