Babcock International Group - Full steam ahead Captain Rogers...

Babcock International: So the General Election is behind them (and us) and it should be business as usual for outsourcers. For Babcock, with their defence related exposure, a Conservative majority was probably a “weee heee” glass of port moment in the boardroom, despite the inevitable and ongoing downward pressure on defence spending. Indeed, the stock market marked them up some 8% on Friday 8^th May, in acknowledgement. (Ed and Nicola were not their “golden dream couple”). These consensus-beating final results, to 31^st March 2015, are inflated by last year’s £1.76bn Avincis acquisition and include the extra equity from the £1.08bn rights issue. So, organic revenue growth at constant currencies is calculated as 12%, with operating profits growing by 11% on the same basis. Eps were up 10% at 68.5p and the adjusted dividend was up an adjusted 10.0% to, a near thrice-covered, 23.6p. Net debt to EBITDA remains very manageable at 2.2x, with 113% cash conversion and the order book sitting at £20bn, against £11.5bn last year (pre-Avincis). The order book has been swelled by £2bn from Avincis, but also includes wins for the London Fire Brigade and Magnox de-commissioning. The surge in contract awards has seen the bid pipeline come down from £17.5bn to £10.5bn, along with some bid failures such as the NSW Air Ambulance.

There are always swings and roundabouts in the process of bidding for contracts, but Babcock enjoyed a 40% win rate last year and a retention rate of 90%, suggesting fairly happy customers. The acquisition of Avincis has pushed ROIC down to 14.5% against 20.7%, but this should recover as they set about improving Avincis (now re-named Mission Critical Services). Consensus eps for FY2016 are 76.5p, but if analysts upgrade then 78p is in sight for a PE of 14.1x at 1102p. Three times dividend cover would point to a 26p dividend for a yield of 2.4%. With c10% growth possible in the coming years, these valuations look reasonable in today’s toppy market. So whilst back in November, I was lukewarm on the shares at 1185p, I would now be happy to tuck a few away, even after the post election flip up. (Neil Cumming^, 18^th May 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower