30th Jul 2015 12:26
LONDON (Alliance News) - FTSE 100-listed support services company Babcock International Group PLC on Thursday said it is trading in line with its first-half and full-year expectations so far in its 2015 financial year, but shares in the company dropped as it said it was taking a hit from the oil and gas industry downturn in its Mission Critical Services business.
Babcock shares were down 5.0% to 987.50 pence on Thursday afternoon, the worst performer in the FTSE 100.
Babcock said it has seen strong demand for its services in the first half, both in its existing contract book and in new business wins. Since its full-year results were published in May, Babcock's order book has remained stable at GBP20 billion and continues to provide strong visibility, with 84% of its revenue for the 2016 financial year secured and 60% of its 2017 revenue in place.
The group's bid pipeline also remains robust at around GBP10.5 billion and it said its tracking pipeline offers good opportunities for growth.
But Babcock did say that it still expects defence and security revenue to be weaker in the first half and said its Mission Critical Services business is taking a hit from the downturn in activity in the oil and gas industry.
Babcock said revenue from its defence and security division will be lower in the first half year-on-year, but is expected to improve in the second half on the anticipated award of the UK Military Flight Training System fixed-wing programme, which Babcock expects to seal in the third quarter of its current financial year. On the back of that, it expects the division to post low single-digit revenue growth for the full year.
The integration of the Defence Support Group, which provides support services to UK military vehicles, has started well, Babcock says, and it sees potential opportunities going forward to growth the contract into further work with the UK's Ministry of Defence.
In its international business, Babcock said its Mission Critical Services business, the former Avincis helicopter and fixed-wing services company it acquired in 2014 for GBP920 million, retained all of its existing contracts which came up for rebid in the first quarter, but is facing issues due to the downturn in the oil and gas industry, where spending plans have been slashed in the face of the falling oil price.
Babcock said the oil and gas unit of the MCS division has seen continued delays and cancellations, particularly in exploration-related services. As a result, oil and gas-related revenue in the business is set to fall by a low-single-digit percentage in the first half, though this will be offset by growth in its emergency services business, meaning total revenue growth for the division in the first half will be around 5%.
For the full-year, Babcock expects 7% growth in the MCS emergency services business in the full year and expects an improvement in oil and gas revenue in the second half, dependent on a number of contract wins, which will mean revenue for the full year is pulled back to flat.
Broker Liberum has consistently raised concerns about the MCS business, saying the Avincis acquisition gave Babcock exposure to the oil and gas industry at an inopportune time. In a note published on Monday, the broker said it was anticipating further pressure for the MCS business due to the oil and gas exposure it has.
On Thursday, the broker went further, saying it is now "beyond doubt" that Babcock overpaid for Avincis, though given oil and gas only represents 4% of revenue, the amount of pain Babcock will face from the division should be limited. It added, however, that emergency services revenue growth also looks behind expectations.
Elsewhere in the business, Babcock said its marine and technology arm has continued to make good progress in the first quarter, helped by a strong performance for its naval marine business on the back of warship refit programmes and the Queen Elizabeth Class carrier procurement activity. The quarter also saw increased levels of activity in its Australian Naval Ship Management joint venture and from its Dockyard Management contract recently secured in New Zealand.
The division has won a GBP120 million contract for an extended docking and work package for HMCS Corner Brook on behalf of the Canadian navy and secured its first offshore renewables deal for the Rampion wind farm, run by German energy group E.ON.
Revenue growth was strong in Babcock's support services business in the quarter, and it expects the growth rate to continue throughout the year, largely driven by the Magnox nuclear decommissioning joint venture with Cavendish Nuclear.
Babcock's network engineering business traded in line with its expectations in the quarter, with increased volumes in rail by a downturn in power activity. The company was also named preferred bidder on a contract to provide education support services to Worcestershire County Council during the first quarter.
By Sam Unsted; [email protected]; @SamUAtAlliance
Copyright 2015 Alliance News Limited. All Rights Reserved.
Related Shares:
Babcock