Babcock confident about bid pipeline after strong first half

Babcock hiked its interim dividend by over a tenth after hitting analysts' forecasts in the first half, and said it is confident of meeting full-year expectations as its order book remains strong.

The firm, which provides engineering support services to the defence, energy, telecommunications, transport and education sectors, reported underlying revenue from continuing operations of £1,556.7m in the six months to September 30th, up 6% from the £1,472.0m registered in the first half of last year.

Organic revenue growth came in at 7.3% during the half, an acceleration from the 6% increase seen in the second half of the last fiscal year, and well ahead of the 6.5% growth expected by Jefferies.

The firm said that the Support Services division was the main driver of growth during the period, delivering organic growth of 18% as contract awards in the preceding six months became operational. Marine and Technology increase organic revenues by 5%, as expected.

"Babcock's strong first half performance reflects our leadership in UK engineering support services, the continuing growth in our major markets and our increasing international presence," said Chief Executive Peter Rogers.

Pre-tax profit rose 13% from £126.3 to £142.7m, while basic earnings per share (EPS) improved by 14% from 28.52p to 32.40p, which Jefferies said was in line with expectations. The dividend for the first half was raised by 10.5% from 5.7p per share to 6.3p per share.

The order book rose from £12bn to £12.5bn year-on-year which provides "excellent visibility of future revenue streams", Babcock said. Meanwhile, the bid pipeline increase from £9.5bn to over £13bn.

Rogers added: "The strength of our order book and bid pipeline underpin our confidence in the future."

The firm's outlook for the Defence markets in particular was pretty bullish, as it explained that strategic reviews in the Ministry of Defence (MoD) have created many opportunities. As the MoD focuses on building a platform with its 'Future Force 2020' strategy, Babcocks' expects that a number of initiatives it has been discussing with its customers over the past few years will start to come to market; "we have seen some evidence of this during the first half".

Net debt reduced from £678.8m last year to £581.1m by the end of the first half bring the net debt-to-EBITDA annualised ratio down from 2.0 to 1.7. [EBITDA: earnings before interest, tax, depreciation and amortisation]

Analysts' views

Jefferies reiterated its 'buy' rating for the stock this morning, saying that the group has the medium-term outlook remains "impressive".

"Babcock is tracking significant opportunities that are expected to move into the bid pipeline over the next one-two years. In particular we sense that momentum has accelerated within the nuclear and defence markets in recent months.

"The scale of these opportunities underpin our confidence that Babcock can return to 10%+ organic revenue growth in FY13E-FY14E."