MARKET REPORT: Shares in Babcock fall by nearly a fifth as UK defense giant warns it could be forced to write off the value of its contracts
Shares in Babcock fell by nearly a fifth yesterday as the British defense giant warned it could be forced to write off the value of its contracts.
The Royal Navy supplier, which jointly built the two British Queen Elizabeth-class aircraft carriers, said yesterday that it had launched a review of the balance sheet and profitability of the contract.
It is audited by an independent accounting firm, not the usual accountant PwC, and early findings suggest it will have a ‘negative impact’ on the company’s balance sheet and income.
Babcock did not say what prompted the revision, but said the results could affect not only the current fiscal year, but potentially future years as well.
The warning scared investors and tumbled shares by as much as 21 percent, wiping out £ 280 million of the company’s value at one point.
While it did recover slightly, Babcock still ended up down 16.4 percent, or 43.2p, at 220.3p, valuing the company at £ 1.1 billion.
The company is already facing higher costs and a slowdown in most of its markets due to the Covid-19 crisis, which poses a major challenge to CEO David Lockwood, who took over last year.
Yesterday, Babcock said underlying revenues fell from £ 3.6 billion to £ 3.4 billion in the nine months to December 31, with underlying earnings falling from £ 320 million to £ 202 million.
The company’s order book at the end of the year was £ 16.8 billion, less than the £ 17.6 billion reported last March.
The company has contracts in the aerospace, defense, emergency services and civil nuclear sectors and counts the Ministry of Defense as one of its largest client. But yesterday, JPMorgan analysts cut their earnings estimate for the company for the current and next two fiscal years by a whopping 9 percent. The fourth quarter [January to March 2021] looks very challenging as the latest wave of Covid-19 has a bigger impact than we thought, ‘they said.
It came on a tough day for UK stocks overall, with the FTSE 100 finishing 0.97 percent, or 66.25 points, at 6,735.71.
The more domestically focused FTSE 250 fell 0.77 percent, or 160.16 points, to 20,615.59.
Analysts said investors had begun to worry about the magnitude of US President Joe Biden’s long-promised $ 1.9 trillion stimulus bill, which some fear will be difficult to get support from Congress and will be accompanied by higher taxes.
At the same time, traders in the UK were concerned that the 2.6 percent contraction in GDP in November, revealed yesterday, was a bad omen for January and February, with much tighter lockdown restrictions now. But it wasn’t all doom and gloom. Industrial software giant Aveva achieved 7 percent, or 248p, to finish at 3805p after confirming it was close to regulatory approval for the acquisition of US rival OSIsoft.
It buys OSI for nearly £ 4 billion and hopes the deal will bolster the services it provides to customers, allowing them to collect detailed data on the performance of ships, oil rigs, chemical boilers, power plants and other machinery.
And British drug giant Astrazeneca rose 0.4 percent, or 33 pence, to 7,592 pence after gaining approval for the cancer drug Imfinzi to be administered to more UK and EU patients with locally advanced, inoperable non-small cell lung cancer. Smaller rival Indivior also rose 9.8 percent, or 10.3p, to 115.3p, after raising its annual earnings forecast.
Elsewhere, fashion group N Brown fell 14.4 percent, or 10.7 pence, to 63.5 pence after revealing another drop in sales over the Christmas period. They were down 8.8 percent in the 18 weeks to January 2 compared to the previous year.