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Babcock International welcomed a “new era of defense” as the UK’s second-largest defense contractor raised dividends and revenue targets against the backdrop of higher military spending amid growing geopolitical tensions.
The FTSE 100 company, which maintains all the Royal Navy’s nuclear submarines and builds warships such as the Type 31 frigate, also announced plans to buy back £200 million on the first Wednesday of the company’s history.
The company’s shares, which more than doubled since the beginning of this year, rose almost 12% in the morning trading after the results were announced, valued Babcock at £5.8 billion.
The company said it expects an average mid-single digit revenue growth rate and an operating profit margin of at least 9% over the medium term from at least before 8%.
“This is a new era of defense,” said David Lockwood, Babcock’s CEO. “There is a growing awareness of the need for investment in defense capabilities and energy security to protect the population and promote economic growth,” he added.
After seven years of absence, the company, which rejoined the Blue Chip FTSE 100 Index in March, enjoys the significant uplifting benefits of defence spending in the UK.
The UK government’s recent strategic defence review prioritized investment in the country’s nuclear capabilities. Babcock’s support projects will also benefit from a plan to increase the country’s nuclear attack submarine fleet from 7 to 12 to 12 through a tripartite bull agreement between the US and Australia.
The annual revenue and underlying operating income through March exceeded the company’s expectations at the beginning of the year, but overall cash generation was also superior to forecasts. Babcock reported revenues increased 11% to £4.8 billion, with growth driven by the nuclear and marine sectors. Operating profit rose 51% to £364 million.
The contract’s backlog was £1.04 billion at the end of March.
The company said it expects to meet its previous medium-term target of operating profit margin, which is an 8% basis, at least one year before forecast.
