Uncertainties remain but defence contractor Babcock says it's time to go for gold

Few businesses have had as lively a decade and a half as the defence and engineering services contractor Babcock International.

The company's work ranges from delivering the Royal Navy's new type 31 frigate and training pilots for the British and French militaries to helping decommission the old Dounreay nuclear establishments in the Scottish Highlands.

Under its former chief executive, the late Peter Rogers, Babcock - one of the storied names of UK engineering - embarked on a dramatic acquisitions spree that took it into the FTSE 100.

It first paid £350m in 2007 for the vast Devonport Royal Dockyard complex in Plymouth, at a stroke making Babcock the sole supplier of refit and maintenance services to the UK's nuclear submarine fleet, as well as becoming the biggest single supplier to the Royal Navy.

Mr Rogers, one of the last of the old-style bruisers that used to dominate British industry, followed that in 2010 with the £1.32bn takeover of VT Group, the old Vosper Thorneycroft, another major support services business.

Then in 2014 he spent a further £1.6bn on the takeover of the helicopter operator Avincis.

That Babcock's stock market valuation today is only £1.55bn gives the casual observer a clue that at least some of these acquisitions - chiefly the last one - did not go entirely to plan.

The company dropped out of the Footsie at the end of 2017 as investors fell out of love with the services sector following a series of high-profile problems at the likes of G4S, Capita, Serco, Interserve and Carillion.

Worse was to follow when, in 2018, Babcock found itself targeted by an anonymous research outfit called Boatman Capital which made a number of allegations about the company's relationship with the Ministry of Defence and, more seriously, accused it of misleading investors with some tricksy accounting.

Babcock insisted this was not the case but its cause was not helped by a series of write-downs and one-off charges.

Investors were further unsettled by the possibility of a Labour government led by Jeremy Corbyn, who was not only committed to scrapping outsourcing but also supported sending Britain's Trident submarines to sea without nuclear warheads.

Boris Johnson's re-election at the end of 2019 put an end to that particular risk but, shortly afterwards, Babcock announced more accounting write-downs.

Then came the pandemic and, shortly afterwards, Babcock scrapped its full-year dividend.

Into this challenging situation, in September last year, came David Lockwood, a renowned turnaround specialist who had just completed the revival and sale of Cobham, another defence services group.

Shortly afterwards, he launched a review of the company's accounting policies, in particular seeking to address the issue of whether it was as profitable as the company had been assuming.

The upshot of that came when, this summer, Babcock reported some £2bn worth of write-downs and accounting charges that left the company deep in the red.

Mr Lockwood himself described that moment as a "line in the sand" and, since then, some investors have looked for signs of a turnaround.

Today, publishing results for the six months to the end of September, the new chief executive could point to some progress.

Describing things as having gone "slightly better than planned", Mr Lockwood reported half year pre-tax profits of £58.8m, compared with a loss of £811.6m in the same period last year.

As investors have come to expect with this company, though, things were a little more complicated than that.

The year-on-year comparison is rendered all the more complicated by the fact that Babcock restated last year's numbers to the tune of £885m and, in particular, some £760m worth of goodwill adjustments.

Getting to grips with the underlying picture is, therefore, complicated - but Mr Lockwood could today point to some progress.

While Babcock suffered negative cash-flow during the period, mainly due to having to increase top-ups to its pension schemes, sales were up by 10% to £2.223bn.

That partly reflected some £85m of "recovered" activity lost last year due to the pandemic but also reflected some £155m worth of growth in existing activities.

Underlying operating profits were also flattered to the tune of £25m worth of costs recovered since the pandemic.

Net debt, a priority for the new management, is also coming down.

Mr Lockwood also insisted progress was being made on the operational front, promising more disposals to take the company to a target of £400m, to be achieved by the end of March next year.

He also said the company was targeting £40m worth of cost savings.

Mr Lockwood added: "This is about being a better business - it's about how the business can operate much more globally with less layers, better communication and how I have line of sight of all the people doing important work.

"It also makes us more resilient against the COVID uncertainties."

But there is still a lot of uncertainty out there.

Mr Lockwood said: "The macro environment is still a bit difficult - we are still seeing a lot of volatility around COVID but compared with 18 months ago we know how to manage that.

"But we are a people based business, we employ 30,000 people, so restrictions on how those people can operate and behave does have an impact."

He said because Babcock was a services business, not a product one, the company was being less impacted than some others by supply chain constraints.

In the meantime, the company is seen as a potential winner from the new AUKUS security pact between Australia, the UK and the US, although some analysts are disappointed that the company no longer sets out the "pipeline" of opportunities it bids for.

Mr Lockwood responded: "The opportunity is clearer. One of the reasons I took this job was because I kind of had this feeling that it is big.

"The nature of our business is that you could end up with six silver medals and no business or two golds and lots of business.

"As we saw recently on the Greek decision to abandon their procurement and buy three French frigates, there's a lot of geopolitical stuff in being a major prime contractor - some of which falls in your favour and some of which falls against you.

"Now we need to make sure we win some gold medals."

Long-suffering shareholders will say "amen" to that.