Share watch: Profits rocket to £460m at defence giant Babcock
It's a mistake to take your eye off big manufacturing corporations these days, because as sure as eggs are eggs, the next time you look at one, it will have morphed into something completely different. I always liked and admired the major British engineering company Babcock and Wilcox, which made boilers and big pieces of engineering kit. But the boilers are gone and Babcock (currently Babcock International) is an essential part of the UK defence establishment and can talk of managing 'mission-critical environments'.
The Babcock organisation that was evolving behind my back is now an engineering support services giant that manages naval bases, is involved in military logistics, nuclear decommissioning and even maintains the current fleet of Trident equipped submarines. It also has a third of its business outside the UK and overall employs 35,000 worldwide and has a market value of £4.5bn (€5.3bn).
The sale of its famous boiler business dates back to the late 1980s but the real re-shaping of the business started with a purpose in 2010 when it merged with the VT group and created the defence and services giant to add to the helicopter service business, nuclear submarines facility and the UK Atomic Energy Authority's commercial arm which it picked up in earlier years.
The company has four main divisions. Its largest unit is the marine business with 35pc of group revenues and 40pc of operating profit. Its defence and security business contributes 17pc of sales and a similar amount of operating profits. Its support services division is the second largest with 30pc of group revenues but operating profit margins less than half of the marine division. The international division is a mixed bag but accounts for 18pc of group revenues.
Babcock's marine service division is the leading support company to the UK's navy fleet of warships and nuclear submarines and is involved in the design of the next generation of nuclear armed submarines. It's 11,000 employees refit, repair and overhaul, and it manages the naval fleet and naval bases in the UK and New Zealand.
The defence and security division employs 6,000, providing major support to the UK's armed forces on land, sea and air.
The company maintains and repairs more than 35,000 military vehicles including tanks.
The group is involved in airbase support and air-to-air refuelling for the RAF. The company's support services are heavily involved in providing services to the nuclear industry. It both decommissions nuclear plants and builds them. Currently Babcock is decommissioning Sellafield and other nuclear sites in the UK and in Japan. Another source of revenue is the renewal and upgrading of overhead power lines for the UK's rail system.
Babcock's international division is a number of unrelated businesses, with helicopter and fixed-wing emergency services including air ambulance, search and rescue and firefighting. Its business in Africa is distributing Volvo and DAF equipment. Its South African business is targeted at engineering support for the mining and energy industry.
The group has been growing revenues and profits. Total revenue last year grew 6pc to £4.8bn, and pre-tax profits jumped 10pc to £460m. The Babcock shares trade at £8.77, up 13pc on the year but off the yearly high of £11. An attraction is its low P/E multiple (12) and a satisfactory dividend yield of 3pc with a market value of £4.5bn. A negative for investors is its debt levels (decreasing) and its pension deficit, but it has the benefit of long-term contracts and substantial barriers to entry. The firm could benefit from increased Nato spending, as its members are under pressure from the US to boost defence spending. While Babcock is very dependent on the UK military sector and may not please the so-called 'ethical' investor, it is a quality share.
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