Babcock (BAB) returns to profit in HY21: Buy call?

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Babcock (BAB) returns to profit in HY21: Buy call?

 Babcock (BAB) returns to profit in HY21: Buy call?
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Highlights 
Defence contractor Babcock’s shares jumped 2 per cent after the company returned to profit in HY21.
The statutory half year 2021 (HY 2021) operating profit stood at £75.4 million, reversing from an operating loss of £785.3 million in HY 2020.
Babcock has cautioned about its activity for the remainder of FY 2021 due to uncertainty surrounding new variants and varying government responses.

Defence contractor Babcock International Group PLC’s (LON: BAB) share rose nearly 2 per cent on Tuesday after the group returned to profit in the first half of the year.

The group’s statutory revenue, for the six-month period ended on 30 September, rose to £2,223 million, up from £2,054 million in the year before (restated figure). The rise was primarily due to growth in the marine and nuclear amongst other factors.

During the period, Babcock posted a statutory operating profit of £75.4 million, reversing from an operating loss of £785.3 million in the previous year. Its underlying operating profit rose to £115.3 million, up from £84.5 million in half-year (HY) 2020.

The group’s HY 2021 underlying contract backlog rose to £10.9 billion, up from £9.4 billion (restated) a year ago. The contract backlog increased after the signing of the Future Maritime Support Maritime Programme (FMSP)

Babcock’s HY 2021 net debt to EBITDA ratio (on a covenant basis) stood at a multiple of 2.8, compared to a multiple of 2.5 in HY 2020.

Progress on turnaround strategy

The new operating model is being implemented across the company. It maintained its annualised cost savings expectations of about £40 million. Some of the changes to its operating model include streamlined processes, centre-led functions and other areas.

The group completed the disposal of its oil and gas aviation business in August for £8 million in net proceeds. It’s Frazer-Nash consultancy disposal was completed in October for a cash consideration worth up to £290 million.

Finally, its stake sale in AirTanker Holdings is estimated to be complete in the second half, with proceeds of £95 million (net of shareholder loans).

Babcock International Group PLC’s (LON: BAB) share price performance

Babcock’s shares were at GBX 312.40, up by 1.83 on 7 December at 12:42 AM BST, while the FTSE 250 index was at 23,202.25, up by 1.40 per cent.

Image source: Refinitiv

The company’s market cap stood at £1,551.17 million, and its year-to-date return was at 11.61 per cent as of Tuesday.

Related Read: BAE Systems & Babcock (BAB): 2 defence stocks to buy and hold for long

FY 2021 outlook

The group said its full-year outlook remained unchanged and that it was on track to report about £20 million in savings in FY 2021.

The company anticipates its FY 2022 free cash flow to be significantly negative, reflecting material cash outflows.

Some of those cash outflows include additional pension contributions, restructuring costs, and other activities.

The group said that while it has seen the recovery of activity, Babcock was cautious about its ability to maintain activity levels and recover all costs for the rest of the FY 2021 due to the uncertainty surrounding new covid-19 variants and due to varying responses by the government.

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