Investors abandon ship on Babcock contract woe
SHARES in Babcock plunged by almost one fifth yesterday as the British defence giant warned that it could be forced to write down the value of its contracts.
The Royal Navy supplier, which jointly built the UK’s two Queen Elizabeth- class aircraft carriers, yesterday said it had launched a review of its balance sheet and contract profitability.
It is being overseen by an independent accounting firm, not usual auditor PwC, and early findings suggest it will have a ‘negative impact’ on the firm’s balance sheet and income.
Babcock did not say what prompted the review but said the results could affect not just the current financial year but potentially future years as well.
The warning spooked investors and sent shares tumbling by as much as 21pc, wiping £280m off the company’s value at one stage.
Although it recovered slightly, Babcock still finished down 16.4pc, or 43.2p, at 220.3p, which values the business at £1.1bn.
The company is already grappling with higher costs and a slowdown in most of its markets because of the Covid-19 crisis, presenting a major challenge for chief executive David Lockwood, who took over last year.
Yesterday Babcock said its underlying revenues fell from £ 3.6bn to £ 3.4bn in the nine months to December 31, with underlying profits tumbling from £320m to £202m.
The firm’s order book at the end of the year stood at £16.8bn, below the £17.6bn reported last March.
The company has contracts in the aerospace, defence, emergency services and civil nuclear sectors and counts the Ministry of Defence as its biggest customer.
But yesterday JP Morgan analysts cut their earnings estimate for the company for the current and next two financial years by as much as 9pc. The fourth quarter [January to March 2021] looks very challenging, as the latest wave of Covid-19 is having a bigger impact than we thought,’ they said.
It came on a rocky day in general for UK stocks, with the FTSE 100 finishing down 0.97pc, or 66.25 points, at 6735.71.
The more domestically-focused FTSE 250 fell 0.77pc, or 160.16 points, to 20,615.59.
Analysts said investors were beginning to fret over the size of US president- elect Joe Biden’s long-promised $1.9 trillion stimulus bill, with some fearing it will struggle to secure backing from Congress and be accompanied by higher taxes.
At the same time, traders in the UK worried that the 2.6pc contraction in GDP in November, revealed yesterday, boded badly for January and February with lockdown restrictions now much tougher. But it wasn’t all doom and gloom. Industrial software giant Aveva gained 7pc, or 248p, to finish at 3805p after confirming it was close to securing regulatory approval for its takeover of US rival OSIsoft.
It is buying OSI for nearly £4bn and hopes the deal will beef up the services it offers to clients, allowing them to capture detailed data about the performance of ships, oil rigs, chemical boilers, power plants and other machinery.
And British drugs giant Astrazeneca edged higher by 0.4pc, or 33p, to 7592p after getting approval for blockbuster cancer drug Imfinzi to be administered to more UK and EU patients with locally advanced, unresectable non-small cell lung cancer. Smaller rival Indivior surged 9.8pc, or 10.3p, to 115.3p as well after hiking its annual revenue forecast.
Elsewhere, fashion group N Brown tumbled 14.4pc, or 10.7p, to 63.5p after revealing another drop in sales over the Christmas period. They dropped 8.8pc in the 18 weeks to January 2 compared with the previous year.