Following what can surely only be described as an extremely traumatic period of much need change, first half year results from Babcock International confirm that while the task laid down by CEO David Lockwood is not yet complete, Babcock International is not only moving in the right direction but is repositioning itself for a potentially very interesting future.
With new strategic focus and operating model designed to produce across the board efficiencies combined with renewed energy, opportunity and very obvious enthusiasm, prospects for significant medium- term financial performance improvement should not be in doubt.
There is a way to go yet but the six-month period results to 30th September demonstrate not only that the company is on track with its huge restructuring plan but also that it is building long term resilience. While of necessity some short-term cautions remains, the long-term outlook for the new Babcock International looks increasingly bright.
In respect of the first half period results CEO David Lockwood told investors that:
“We are on-track with our turnaround strategy with around £400 million of disposals to bolster our balance sheet announced to date” and that “we will continue to align our portfolio to best support the Group’s capital allocation priorities and future growth. The ongoing implementation of our new operating model means Babcock will be a simplified, more focused Group. While our half year results show some recovery from the financial impact of COVID-19, we remain cautious as we are early on in our transformation and as we manage inflationary and supply chain pressures across the business and potential interruptions from COVID-19. However, the Board believes the actions we are taking will enable the Group to take advantage of the many opportunities ahead of us, leading to improved cash generation and profitability in the medium term.”
Additionally, he said that “We are pursuing a number of important growth opportunities, with significant contract wins in military communications, our first order for an export licence for our Arrowhead 140 frigate as part of the Type 31 programme, and an agreement for potentially significant work in Ukraine, supported by both the UK and the Ukrainian governments.
While, as I have already implied, there remains considerable work to be done before full operational benefits flow through to the bottom line, opportunities for Babcock International continue to grow. Not yet complete, already announced portfolio realignment that has already included £400 million of announced disposals has reduced net debt.
The new operating model which is designed to provide annualised cost savings of £40 million when fully complete is based on streamlining of operational processes and controls, increased standardisation along with new group-based principles including agile working.
Announcing a period end contract backlog of £10.9bn that apart from Ukraine includes the £3.5bn Future Maritime Support Programme for the Royal Navy that stretched through 2026 together with a £500mcontract for defence aviation training in France, a £150mlogistics support contract which is part of the UK’s next generation tactical communications and information systems and a £110 contract to deliver the UK’s new Defence Strategic Radio Service and subsequent to half year period end, a £100m design, manufacturing, commissioning and in-service support to the Maritime Electronics Warfare Systems Integrated Capability (MEWSIC) together with the company announced as preferred bidder by the Australian Government for the upgrade of its Defence High Frequency Communication System designed to support the nations armed forces over ten years and beyond come on top of the company having in September cut the first steel on the first of five Type 31 frigates for the Royal Navy at its newly opened purpose built facility at Rosyth.
The full year outlook for FY22 is unchanged although in common with many other companies, Babcock International is surely right to warn that uncertainties remain in respect of managing inflation and supply chain pressures. Additionally and as already anticipated, while the overall recovery and change process is on track, FY22 free cash flow is expected to remain significantly negative following ongoing investment in facilities and IT, together with cash outflows in respect of additional pension contributions, restructuring costs flow and the announced change and unwinding over time of the historical management of working capital around period ends.
Babcock International is a hugely important UK based company and it is pleasing to see that, following an extremely difficult period that required root and branch change in operation, forward strategy and intent, that the company is now very clearly moving in the right direction.
CEO David Lockwood and his team have worked extremely hard to push through an almost unprecedented level of change as a long-time keen observer, I for one am left in little doubt that the future for Babcock International looks extremely bright. Of necessity, changes being undertaken on such a scale as this require time before the beneficial result of actions being taken flow through to the bottom line. But make no mistake, in rebuilding itself and accepting the need for significant operational and strategic change, by investing in its future, building the potential for future international opportunities and in displaying positivity and determination throughout, the best words that I can find to describe future for this very interesting company are simply onwards and upwards.
CHW (London 7th December 2021)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785