Babcock International Group PLC

Who is Babcock ?

Babcock International Group PLC is a holding company. The Company provides engineering services. Its segments include Marine and Technology, Defense and Security, Support Services and International. The Marine and Technology segment delivers support to the United Kingdom Royal Navy’s submarines, naval ships and infrastructure. It also offers solutions in engineering, equipment management, consultancy, information and knowledge management. The defense and security segment offers engineering and training support services. The Support Services segment delivers services to both public and private sector customers across three areas: civil nuclear, asset management and technical training. The International segment is engaged in developing its aviation emergency services business, Mission Critical Services (MCS). The Company serves customers in the United Kingdom and around the world across four market sectors, including [1] marine, [2] land, [3] aviation, and [4] nuclear.

Today the company published Full year results for the year ended 31 March 2018:

It is best to summarise looking at the data first.

Statutory Mar-18 Mar-17 Change
Revenue £4,659.6m £4,547.1m 2.50%
Operating profit £370.6m £359.6m 3.10%
Profit before tax £391.1m £362.1m 8.00%
Basic earnings per share 66.6p 61.8p 7.80%

The underlying results were similar with higher revenues (£5,326 m) & earnings (83p), so prefer to look at the more conservative format.

The company has seen consistent top line revenue growth and bottom line earnings over the past 5 years.

Key Fundamentals 31-Mar-13 31-Mar-14 31-Mar-15 31-Mar-16 31-Mar-17
Revenue (£ m) 3029.4 3321 3996.6 4158.4 4547.1
Pre-Tax (£ m) 206.6 197.9 283.7 295.5 305.4
EPS 48.80p 50.10p 52.90p 57.00p 61.80p
PE 20.53 26.89 18.61 16.66 14.27
PEG 0.28 10.09 3.33 2.23 1.64
EPS Growth 74.08% 2.66% 5.59% 7.46% 8.72%
Dividend Cover 27.89 2.34 2.24 2.21 21.95
Dividend Yield 0.17% 1.59% 2.40% 2.72% 0.32%

The PE at last report was 14x. With todays market cap of approximately £3.9 bill and share price of 775 pence, the earnings multiple over the statutory EPS would be 11.7x which seems to be acceptable value in the context of the FTSE 250 which is at 16.95x.

 

The long term historical view:

Weekly chart for Babcock

An observer can see a company that has experienced a 7-times increase in share value over a 10 year period with a 50% decline from peak value (mar 2014) to date.

The current volatility +/- 3 st deviation is [550,875] which is a (historically implied) 35% price range and suggested for trading ranges.

Timing: It is negative that an entrant today is buying at the upper end of the technical trading range if they were to enter today. However, new information (from the report) may change this going forward as on a fundamental basis it is seen that BAB offers value.

Forward looking view:

  • Dividend

This year, underlying basic earnings per share increased by 3.6%. The Group continued to strengthen the balance sheet and achieved its target of delivering pre capital expenditure cash conversion of over 100%. Together with a combined order book and bid pipeline of around
£31 billion, this enables the Board to remain confident in the long term future of our business and it therefore is recommending a 4.6% increase in the final dividend per share for 2018 of 22.65 pence (2017: 21.65 pence). If approved by shareholders at the AGM on 19 July 2018, this will give a total dividend for the year of 29.5 pence per share (2017: 28.15 pence per share), an increase of 4.8%. The final dividend will be paid on 10 August 2018 to shareholders on the register at 29 June 2018.

=> positive

  • Outlook

The revenue visibility provided by around £31 billion of secured orders and near term opportunities offers continued prospects for growth in line with previous expectations for this year and over the medium term. The Board is confident that the Group will achieve low mid-single digit organic revenue growth with broadly stable margins in 2018/19, despite the scheduled step downs in the Aircraft Carrier and Magnox decommissioning programmes. The Group expects continuing good cash generation and is targeting a net debt to EBITDA ratio of 1.4 times at the end of the current financial year.

=> positive

  • order book

The order book stood at £18.0bn at the year end, down 5.3% from £19bn.

=> negative

  • growth

The group said it expected to deliver low single-digit organic revenue growth following the scheduled step downs of the Aircraft Carrier and Magnox programmes. Margins would remain broadly stable over the medium term.

=> acceptable

 

Breakdown of segments:

The four sectors are as follows.

  • Marine
  • Land
  • Aviation
  • Nuclear

The breakdown (data taken from results reported) are as follows:

sector revenue 2018 revenue 2017 change YoY % business
marine £1,766.50 £1,873.80 -5.7% 38%
land £1,760.40 £1,685.40 4.4% 38%
aviation £921.10 £793.10 16.1% 20%
nuclear £211.60 £194.80 8.6% 5%
total £4,659.60 £4,547.10 2.5% 100%

 

It is seen that increased revenues from all sectors has more than offset decrease from marine leaving a net 2.5% increase.

 

Comparables:

Pulling data from over 40 industrials, it is observed that on a (trailing) PE measure, BAB ranks at number 5. The PE range is for the sector is 8.4 to 50. One needs to be careful interpreting the below, for example, forward earnings as opposed to trailing, but nevertheless, this is a good starting point for value.

A list of the top 25 are published here (with some being closer comparable companies than others):

Sector exch share name price ccy eps p/e market cap
Industrials lon jlg John Laing Group PLC 285.4 GBX 0.34 8.4 1,400,674,006
Industrials lon gog Go-Ahead Group plc 1861 GBX 2.15 8.7 802,559,470
Industrials lon mgam Morgan Advanced Materials PLC 348.4 GBX 0.36 9.7 994,229,021
Industrials lon qq QinetiQ Group plc 245.59 GBX 0.24 10.2 1,393,087,461
Industrials lon bab Babcock International Group PLC 792.8 GBX 0.66 12.0 4,008,369,434
Industrials lon fgp FirstGroup plc 117 GBX 0.09 13.0 1,416,844,871
Industrials lon bby Balfour Beatty plc 304.8 GBX 0.23 13.3 2,102,325,833
Industrials lon tpk Travis Perkins plc 1343.5 GBX 0.92 14.6 3,387,553,122
Industrials lon hwdn Howden Joinery Group Plc 506 GBX 0.30 16.9 3,114,292,813
Industrials lon mggt Meggitt plc 497.2 GBX 0.29 17.1 3,860,534,837
Industrials lon nex National Express Group PLC 421 GBX 0.23 18.3 2,154,419,999
Industrials lon plp Polypipe Group PLC 403.8 GBX 0.22 18.4 806,580,203
Industrials lon has Hays plc 186 GBX 0.10 18.6 2,698,169,401
Industrials lon boy Bodycote PLC 930 GBX 0.48 19.4 1,780,541,963
Industrials lon agk Aggreko plc 739.5 GBX 0.38 19.5 1,894,068,512
Industrials lon gfrd Galliford Try plc 961 GBX 0.48 20.0 1,066,400,731
Industrials lon page Pagegroup PLC 537.12 GBX 0.26 20.7 1,756,566,283
Industrials lon wizz Wizz Air Holdings PLC 3313 GBX 1.49 22.2 2,408,763,860
Industrials lon fsj James Fisher & Sons plc 1780.26 GBX 0.80 22.3 894,826,842
Industrials lon imi IMI plc 1184 GBX 0.52 22.8 3,221,009,212
Industrials lon ule Ultra Electronics Holdings plc 1624 GBX 0.67 24.2 1,210,571,483
Industrials lon ckn Clarkson PLC 2590 GBX 1.04 24.9 783,039,362
Industrials lon iwg IWG PLC 301.9 GBX 0.12 25.2 2,749,673,206
Industrials lon sgc Stagecoach Group plc 158.36 GBX 0.06 26.4 907,938,330

 

 

Conclusion (May 2018):

Babcock International Group PLC (BAB) appears to be, for now and the near term a reasonable buy with a potential 45% upside if, albeit low single digit, growth can be sustained.

 

 

 

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