Babcock
It is the dog that didn’t bark. Babcock is the large government contractor that has been causing the analyst community the three-pipe problem of why it hasn’t followed other outsourcing giants — Capita, Serco, Mitie, Interserve and, of course, Carillion — into financial crisis. The reason this dog didn’t bark, as Sherlock Holmes would have deduced, is that it didn’t have to.
Many analysts have been wondering for years when Babcock’s “moment” of crisis would come.
Babcock has long argued that to link it with lower-margin outsourcers who clean the floors at public sector offices or do back office government number-crunching is a misreading of the facts.
Instead, Babcock provides engineering services that keep the air force flying and the navy’s boats floating. Its margins are 10 per cent-plus compared with the sub-5 per cent, or indeed minus in places, of others in the support services sector.
It stays close to its main client, the Ministry of Defence, to ensure that it doesn’t have major contractual blowouts. Its only exposure to the cost-cutting Cabinet Office is work for the Nuclear Decommissioning Authority, which is also high-end engineering and pays high margins.
It could be smart for Babcock to get itself reclassified in engineering. So far, this advice has been ignored.
Yesterday, Babcock confounded the doom-mongers again. It posted an 8 per cent rise in annual pre-tax profits to £512 million in the year to March 31, while revenues hit £4.6 billion. Both were records, albeit not wholly unexpected. The City liked the cash conversion — an issue that has brought down so many in support services — which enabled it to cut debt 5 per cent to £1.1 billion. Analysts also liked the £31 billion order book and bid pipeline.
Babcock runs boatyards such as Devonport in Plymouth and Clyde in Scotland for the MoD, and at Rosyth it has helped to build Britain’s two new aircraft carriers. It also looks after and helps train the British Army and runs airbases, maintains aircraft and trains pilots for the RAF.
Its pipeline of work includes the design, build and maintenance of the new Type 31e frigate; training RAF and Royal Navy pilots in fighting; £500 million work at the new Hinkley Point C nuclear power station; and delayed electrification work with Network Rail.
Crucially, the pipeline also includes bidding for contracts to train Canadian and Spanish air force pilots. This is the sort of work that will wean Babcock off its dependence on the UK MoD and hit its target of 30 per cent of income from overseas. The Australian military and South African mining industry are already fertile grounds for Babcock and it is training French air force pilots.
Stephen Rawlinson, an independent sector analyst, admits to being puzzled by Babcock. He wonders about the sustainability of those 10 per cent margins, worries about debt still at 1.6 times ebitda profits and says the good cash conversion gets eaten pretty quickly by having to service debt, pay into the pension funds, pay HMRC, and keep up capital expenditure and invest in technology.
Though the shares lifted 19½p to 784p yesterday, Mr Rawlinson believes Babcock’s stock profile “is more typical of a flawed building contractor with a chequered history than an engineering services company”.
From £10.91 18 months ago to 631p during the fallout from the Carillion fiasco this year, Babcock shares have now put on about 25 per cent in three months. Babcock has not been an elementary case for the City to crack, but with a strong dividend record, the signs are it may be a dog worth going for a walk with.
ADVICE Buy
WHY Babcock has been unfairly tarred by other contractors’ misdemeanours. The shares have fallen too far
Bakkavor
Last autumn Bakkavor, which fills the aisles of many of Britain’s biggest grocers with chilled food, got cold feet and pulled an initial public offering with a mooted valuation of £1.5 billion (Callum Jones writes).
The decision was made after much angst with the company blaming market volatility. A week later the float plans came out of the freezer. Where bankers had sought to drum up interest with a price of between 195p and 235p, the shares were sold at 180p last November, producing a market value just north of £1 billion.
Yesterday Bakkavor faced a muted reaction to a brief update on trading, with the shares gaining just 1p to 200p. Business remained in line with expectations, it said, with group revenues up 1.5 per cent in the 19 weeks to May 12.
Growth in the UK has been hit by inflation but Bakkavor expects higher revenues later in the year from improving market conditions and new business. Already boasting a list of clients that includes Tesco, Marks & Spencer, Waitrose, Sainsbury’s, Asda, Morrisons, Co-op and Aldi, it is hard to see where else the company is looking. With worldwide customers including KFC, Starbucks and McDonald’s, Bakkavor, which also operates in China, reports that growth remains strong, driven by new products and increased demand.
The company, which makes 2,000 products in the UK, including ready meals, salads and desserts, was set up by Agust and Lydur Gudmundsson to supply and export cod roe. Agust Gudmundsson is chief executive, while Simon Burke, formerly of Virgin Retail UK, is chairman.
After its initial hesitation last year, Bakkavor, which is a constituent of the FTSE 250, has enjoyed a relatively calm start. Shares peaked at 212½p in February before slipping under their debut level to 174p the next month.
Agust Gudmundsson pledged “further growth and success as a listed business” when it started publicly last year. Revenue growth of 1.5 per cent is unlikely to inspire investors but as inflation wanes, overall trading may improve.
As shares hover below £2, their sell-by date feels a way off yet.
ADVICE Buy
WHY After a steady start, management are optimistic for the rest of the year