Shares in defence stock Babcock International (LSE:BAB) were up over 30% this morning on the news that the firm will be cutting over 1000 jobs. Babcock International stock had been rangebound, trading in the 225-265 area since February.
Investors see write down as good news
The company is announcing significant write offs, which it says will affect profits, but this is being viewed as good news by investors who obviously felt that the firm was in need of a restructure. Babcock provides the maintenance and support for the strategically vital UK nuclear submarine fleet.
The company employs around 30,000 people, and is cutting close to 1000 jobs, with more than 800 scheduled to go in the UK. But several of its business lines also look likely be sold off, raising more than £400m in cash. Investors had been worried that Babcock might be about to tap them up via a rights issue to raise money. This could include its helicopter transport division Avincis, which it bought from private equity firm KKR in 2014.
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Babcock has an oil and gas aviation business that is used by oil firms to transport employees to and from offshore oil platforms. This is being sold off to CHC Group, Babcock reported today.
News of the write down was widely anticipated – the market had been braced for potentially worse intelligence than it has in fact been given, reflecting the sudden rush back into the stock.
“As Babcock withdraws from sectors such as helicopters, oil and gas, they become ever more reliant on core defence markets, particularly the UK,” said Jack Winchester, an analyst at Third Bridge. “Babcock’s sales pipeline provides some confidence in their operations over the next few years, but the strength of their relationship with the MoD will decide the company’s fortunes in the long term. The UK’s multi-billion increase in defence spending and efforts to drive up defence investment across Europe give Babcock a more favourable commercial environment in which to operate.”
Babcock International shares had been costly to hold since the stock fell off a six month peak of more than 360, which it reached back in November, following a steep climb fuelled by investor demand.
Defence sector could see a boom in 2022
Babcock is operating in what we feel is still going to be a robust sector going forward. Several countries have recently reported they are raising their defence budgets. While the UK is going to be an important client for Babcock going forward, we note that several Asian countries are reviewing their options. One of Babcock’s priorities should be to get a piece of this pie, especially in the naval and aviation areas.
The commercial interest in Babcock’s Type 31 platform is another opportunity for the company, with previous Babcock Marine CEO John Howie claiming there have been over 30 overseas expressions of interest in their frigate. The UK’s Department of International Trade is expected to play matchmaker between Babcock and potential governments.
In speech to Parliament last month the Defence Secretary Ben Wallace made it clear that the UK government will also be spending more in the area of advanced technologies, with over £6bn ear marked for “research, development and experimentation.”