Morningstar | Babcock Increases Expected Revenue Loss From Magnox; Underlying 1H Results Broadly in Line
Narrow-moat Babcock reported first-half 2018-19 underlying results that were close to consensus expectations, albeit with slightly weaker revenue. However, the shares were weak as the company revised up its future revenue losses expected from the Magnox contract termination. The revision includes a 2019-20 negative revenue impact of GBP 250 million, or 2.5 times as much as previously expected. A further GBP 100 million hit to revenue will come in 2020-21. Management also announced a noncash GBP 120 million charge with the bulk attributable to its oil and gas helicopter business, including a GBP 38 million impairment charge and a GBP 42 million markup of lease provisions. Babcock provides helicopter transportation to the oil and gas industry; however, this remains a market with overcapacity issues, despite the oil price recovery, causing significant pricing pressure. We expect to make a moderate downward revision to our GBX 870 fair value estimate.Underlying revenue growth at the company's largest division by EBIT, marine, was 2.1% excluding the expected step-down in revenue from the U.K. warship Queen Elizabeth Class project. Unadjusted for this step-down, revenue looked worse with a decline of nearly 7%. The divisional EBIT margin remained stable. Babcock secured two new U.K. Ministry of Defence contracts in the division, a five-year maritime training and support contract and a previously announced five-year naval design partnership.
The aviation division increased organic revenue and EBIT by 24% and 4.5%, respectively, with noticeable difference in growth due to the phasing of new contracts, with earlier stages contributing lower-margin revenue.
In the land division, organic revenue fell 10% in the first half while EBIT was up nearly 16% with the EBIT margin helped by higher-margin contract revenue as well as margin improvements in the South Africa equipment business.
Babcock International Group is a holding company. Through its subsidiaries, Co. operates in four sectors: Marine, which provides an array of marine and naval engineering services; Land, which provides fleet management and training for customer-owned defense, emergency services, global airport and commercial vehicle fleets, as well as engineering services and technical training for customers worldwide; Aviation, which delivers an array of engineering services to defense and civil customers; and Cavendish Nuclear, which delivers nuclear engineering on nuclear decommissioning programs and projects across the U.K., as well as nuclear engineering services in training and operation support.
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