Key Takeaways:
- Reports 10% organic revenue growth to £5.27 billion, beating estimates
- Takes a £140 million charge on its Type 31 frigate program due to rework
- Announces a new £200 million share buyback, keeping FY27 outlook unchanged
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Babcock Rises 3.6% Despite £140 Million Type 31 Contract Charge
Babcock International Group PLC (LON:BAB) announced a £140 million charge on its Type 31 frigate contract, yet its shares rose after the company reported strong underlying growth and a new share buyback for fiscal 2026.
“It is really disappointing,” Group CEO David Lockwood said regarding the charge. “It’s not what I would have wanted in this year.”
The London-based defense contractor beat analyst expectations on core metrics before the one-off charge. The company put consensus for revenue at £5.11 billion and underlying operating profit at £411 million.
Shares climbed 3.6% to 1,043.14 pence as investors focused on a new £200 million share buyback and an unchanged outlook for fiscal 2027, which has about 70% of its revenue already under contract. The charge overshadowed a 10% increase in organic revenue and a 19% rise in underlying profit before the charge.
Type 31 Costs
The £140 million charge reflects a full re-estimate of costs to complete the Type 31 design and build contract. The company said it experienced “higher than expected levels of rework as a result of changes to the design” and out-of-sequence build activity.
About £100 million of the total will be recognized as a revenue reversal, with the remaining £40 million increasing the contract loss provision. The cash costs will be incurred over the remainder of the program.
Strong Underlying Performance
Excluding the charge, Babcock’s performance was strong. Organic revenue growth was driven by a 14% increase in the Nuclear division and a 34% surge in Aviation revenue. Marine revenue grew 8% before the impact of the charge.
Underlying operating margin improved to 8.2% from 7.5% a year earlier, and underlying free cash flow grew to £262 million from £153 million. Net debt narrowed to £329 million from £373 million.
The strong underlying results demonstrate the health of the core business, but the significant charge on a flagship program highlights ongoing project execution risks. Investors will watch for updates on the Type 31 program's progress and the deployment of capital through the new buyback.
This article is for informational purposes only and does not constitute investment advice.
