Based on draft management accounts, before a detailed management review and subject to audit, Babcock International has this morning posted an early view on its likely results for the year ended 31st March 2023 along with a further update on Type 31 build progress for the Royal Navy.
The company anticipates FY23 results to confirm group cash flow to have been significantly ahead of expectations – this reflecting strong operational performance and the conclusion of the disposal programme, including receipt of c.€100 million of completion adjustments on the disposal of the European Aerial Emergency Services businesses.
Net debt as at 31 March 2023 was c.£350 million before operating leases. Group underlying profitability for FY23 is in line with expectations, excluding the potential one-off impact of the Type 31 contract as outlined below.
Given the stronger than expected cash performance and further de-gearing of the balance sheet, the Board expects to reinstate a dividend in FY24.
Comment
Having all but completed what has been a necessarily long and difficult portfolio realignment programme, one that contained some significant disposals, the message from Babcock International today is one based upon much improved confidence. Moving forward, the company will also further benefit from the work done over the past two years to strengthen the operating model, streamlining of processes, structures and the improving of controls. This is a different and very much stronger company today than the one that CEO David Lockwood joined as CEO in September 2020. That should also be seen as another big positive for UK sovereign defence.
While there are issues on Type 31 (see below) with the company and the MOD customer still need to resolve, none of this should ignore that the underlying relationship between Babcock International and its MOD customer have significantly improved over the past two years. That is the result of considerable effort and is to be welcomed. Babcock International is today engaged on a huge variety of MOD land, air and maritime – ship manufacturing and large-scale surface and sub-surface vessel contract support work including capital equipment maintenance and refit, operation and maintenance and support work. Within the military and by the MOD customer, it is good to see the company once again being held in high esteem.
CEO David Lockwood and his team have placed Babcock International in an excellent forward position and the opportunities they have created as a result are significant. Having previously announced export agreements with Indonesia and Poland for the Arrowhead 140 (AH140) naval ship design and which acts as the base design for the Royal Navy Type 31 programme, together with new various defence contracts in Australia, France and the UK over the past year, the company looks set fair for a period of very interesting growth.
Type 31 contract update
Awarded by the MOD to Babcock International in November 2019, Type 31 envisages delivery of five ‘Inspiration’ Class frigates for the Royal Navy. The ships are based on Babcock’s Arrowhead 140 hull design and have an average production cost of £250 million per ship. To date, the company has recognised over £600 million of revenue but no profit on the programme. The Type 31 programme is expected to conclude in 2028 and it remains on schedule against what is clearly a demanding production plan and despite restrictions imposed by the COVID-19 pandemic. To that end, the company has confirmed today that HMS Venturer, the First in Class ship is due to be structurally complete in December 2023 and that in January 2023 construction commenced on the second ship, HMS Active.
Throughout the last financial year, the company we have been in dialogue with the MOD customer in regard of the contractual position regarding additional forecast costs resulting from certain material macroeconomic changes that were not foreseen at contract inception. These have led to an increase in the actual and projected programme costs to deliver the programme as planned.
The company has been unable to reach agreement with our customer as to who is responsible for the additional costs under the contract. As a result, a dispute resolution process (DRP) under the contract has commenced. The DRP may lead to an arbitration. If the contractual position remains unresolved, the lack of recovery of these additional costs would need to be reflected in the Group’s FY23 year end results.
Without recovery of the additional costs, the company believe that the [Type31] contract would be loss-making and our preliminary assessment, subject to finalisation and audit, is that a one-off provision of between £50 million and £100 million would be required to cover the duration of the contract.
The related cash impact would be of a similar amount, realised over the remainder of the programme. Any settlement or arbitral award would reverse the provision in part or in full. The position in relation to the Type 31 contract does not affect progress or profitability of the Group’s existing Arrowhead 140 export contracts and we continue to be in active discussions with a number of prospective customers.
CHW (London – 20th April 2023)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785
Skype: chwheeldon
@AirSeaRescue