Babcock to take £1.7bn hit to profits after contract review

Babcock International is to take an exceptional charge of £1.7bn for the year to March 2021 and will seek to raise at least £400m through disposals as part of a sweeping overhaul planned by its new management.

Britain’s second largest defence contractor said that the largely one-off, non-cash, charge — identified after a profitability review of its contracts — was expected to result in a reduction in the group’s underlying operating profit of about £30m each year.

The company will restructure how it operates at a one-off, cash cost of about £40m. The overhaul, however, is expected to deliver annual savings of about £40m. Disposals are also on the agenda, which Babcock expects to generate at least £400m over the next 12 months.

The unscheduled trading update comes as chief executive David Lockwood puts his stamp on the group. Lockwood began a strategic review shortly after he took the helm in September and subsequently launched an audit of the company’s contract profitability and balance sheet in January. 

Analysts had speculated the defence contractor might resort to a rights issue to shore up its finances but Lockwood insisted on Tuesday that “through self-help actions, we aim to return Babcock to strength without the need for an equity issue”.

“We are creating a more effective and efficient company through our new operating model and, in line with our new strategic direction, will rationalise the group’s portfolio to help strengthen our balance sheet,” he said.

Babcock provides maintenance and support for the UK’s nuclear submarines at Faslane, and was a member of the consortium that built the Royal Navy’s new aircraft carriers.

The results of the review will be seen as the company distancing itself from previous management teams.

The company released draft results for the year to end March 2021, showing underlying revenue of £4.69bn, down from £4.87bn the previous year. Underlying operating profit was down from £524m to £307m before the exceptional charge. Net debt at the end of the year was £750m.