Delays to submarine spending sink shares in outsourcer Babcock

DEFENCE outsourcer Babcock’s shares dived after the company warned of a slowdown in spending on the UK’S massive nuclear submarine programme.

Investors took flight as Archie Bethel, the chief executive, used an annual general meeting statement to say that the newly formed Submarine Delivery Authority had pushed back purchases of some “non-critical” equipment. Shares fell 8.8pc to close at 732.6p, wiping more than £350m off Babcock’s market value.

Mr Bethel tried to ease concerns, saying the delayed purchases into next year for programmes such as the new “Dreadnought” nuclear missile submarines amounted to only £70m.

“We will do £2bn of business with the MOD this year and in the scheme of things, £70m of slippage is not material but it is annoying,” Mr Bethel said. “While annoying, it definitely does not signal a broader slowdown in UK defence spending.” The SDA was formed in April with the aim of ensuring that the submarine programme – seen as absolutely critical to national security – is delivered on time and budget. It took control of the programme into a body separated from the rest of defence procurement, and led to a shake-up of other parts of military equipment acquisition.

Mr Bethel said that Babcock had only been notified of the SDA delays in the past few weeks, and added the company’s land division supplying the Army faced similar issues.

However, industry sources said other companies working on the UK’S submarine programme – which is led by BAE Systems – had not disclosed any similar purchasing delays.

“We’ve met with BAE and others exposed to the submarines in the past few weeks, and no one has mentioned any delays,” said one analyst. “It is very strange indeed.”

Overall for the year, Babcock said it expects trading to be in line with expectations, with low single-digit revenue growth.

Mr Bethel also said that the company is selling off what it sees as non-core and low-margin businesses as it focuses on its defence, emergency services and nuclear operations. Two of these disposals are the US construction business and a power line unit in South Africa. The disposals will contribute to slower than expected revenue growth this year. Mr Bethel also hinted that Babcock’s helicopter operations serving the oil market could be sold.

“We are looking at businesses that are non-core and not meeting our margin requirements, and getting out of them,” Mr Bethel said when asked if the unit was a possible candidate for sale.

“A key part of positive management is getting out of businesses which are not performing.”

The oilfield services operations were acquired when Babcock bought Avincis for £1.1bn in 2014, which it wanted for its helicopter emergency services unit, not oilfield transport.