Wednesday 12 February 2020 8:47 am

Babcock lowers profit guidance amid oil and gas woes

UK defence contractor Babcock lowered its guidance for profit for the year today in the company’s first update since chief executive Archie Bethel said he would step down.

Shares in the defence giant dropped over four per cent in early trading after a quarter which the outgoing chief labelled as “frustrating”.

The group estimated operating profit of £540m, at the lowest end of its previous guidance of £540m – £560m for the coming financial year.

Read more: Babcock chief steps down after four years in top job

Its forecasts for revenue and cash flow remained in line with November’s guidance, at £4.9bn and £250m respectively.

Babcock added that it would also incur a one-off £85m writedown on assets in its oil and gas business as the defence giant prepares to exit its operations in Ghana and Congo.

The reduced guidance was put down to challenges to the firm’s aviation business, especially in southern Europe, which will undergo restructuring due to the “disappointing” oil and gas performance.

Bethel said that Babcock had lost several major bids in the division after changes to global market pricing.

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Although the company has been selected as the preferred bidder for a number of aerial emergency services contracts worth £600m, delays have meant this revenue has not yet been forthcoming.

However, it said that its marine division, of which Bethel was head before taking on the top job, continued to “exceed expectations”, with strong revenue growth driven by warship support activity in the US and Australia.

Last year Babcock broke BAE Systems’s stranglehold on UK naval shipbuilding when it won the £1.3bn contract to build the new type 31 frigate.

Neil Wilson, chief markets analyst at markets.com, said: “It’s been a tough period for Babcock. There is still something of a Boatman overhang but the real issues remaining are what’s driving the stock now.

Read more: Profit jumps as Babcock buoyed by marine division

“I’d stick to the view that the share price has been undervalued by the market as it’s been tarred by the outsourcer brush, whilst there are longer-term fears about exposure to UK defence contracts, a revenue stream that can be decidedly lumpy. 

“This is no ordinary outsourcer – defence contracts are not open to all comers – but a sweeping defence review this year could present problems if plans to ‘level up’ the UK means taking investment away from the armed forces”.

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