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:
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 | 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.