21st Nov 2023 16:44
(Alliance News) - Babcock International Group PLC's first half profit came in last week above Shore Capital's expectations, with the latter pointing to a number of tailwinds allowing it to upgrade its forecasts for the London-based aerospace and defence firm.
In the six months that ended September 30, Babcock's pretax profit jumped to GBP136.1 million from GBP51.2 million a year prior.
Revenue climbed 1.5% to GBP2.18 billion from GBP2.14 billion. This was around 5% higher than Shore's estimate and showed around 18% of organic growth.
Shore also said Babcock's earnings before interest and tax came in 9% above its expectations.
Babcock noted that its contract to support UK-gifted platforms to Ukraine are now operating at full capacity.
Notably, net finance costs halved to GBP14.1 million from GBP28.2 million, but net income tax expense increased to GBP32.0 million from GBP14.2 million.
After a four-year hiatus, the company declared an interim dividend of 1.7 pence per share.
"The group has a number of tailwinds supporting its development such as: geopolitics across defence activities, energy infrastructure spend, a growing contract pipeline and contract phasing seeing a margin uplift strengthening in the next financial year [financial 2025 forecast] and into financial 2026 forecast from March] – all off a robust balance sheet," said Shore analyst Robin Speakman.
Looking ahead, Babcock said it continues to expect organic revenue growth "for another year", underlying operating margin expansion and positive cash flow.
It said over 90% of financial 2024 forecast revenue was under contract at the end of September, entering the second financial half with good momentum.
Similarly, Shore said it upgraded its financial 2024 forecasted revenue and Ebit for Babcock by around 4% on the back of a strong first half, which Shore believes "still sits within management's guidance metrics".
Shore expects an annual dividend of 4.7p, covered around eight times by earnings.
Shares in Babcock were down 0.5% to 400.40 pence each in London on Tuesday before closing.
Shore said shares trade off a financial 2024 forecasted price-to-earnings ratio of 10.5 times and enterprise value against earnings before interest, tax, depreciation and amortisation of 5.5 times, now falling "steadily with upgrade potential reflecting the environment across defence, aviation, gas, and nuclear markets".
Shore maintains its 'buy' rating for Babcock, applying a 9% risk premium weighting to its valuation. This suggests a short-term fair value of around 465p per share, Shore said, a 16% upside to the current share price.
"It remains early in Babcock's share price recovery, and we anticipate that the group's financial performance will continue to improve as we move forward into [financial 2025 forecast], with cash generation also delivering further asset allocation options to drive shareholder value. Greater disclosure will also see the investment case strengthen," said Shore analyst Speakman.
By Greg Rosenvinge, Alliance News senior reporter
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