Babcock shares soar on margin lift in 'new era' of defence spending

(Sharecast News) - Shares in Babcock surged by 13% on Wednesday as the UK defence and nuclear engineering company said it expected to hit its underlying operating margin of 8% a year early and increased its medium-term target in a 'new era' of weapons spending amid global political instability. The company posted a sharp jump in annual operating profit to £364m from £241.6m a year earlier and also announced its first-ever share buyback of £200m. Its contract backlog was up slightly to £10.4bn from £10.3bn.

The warship and weapons systems maker lifted its medium-term underlying operating margin forecast to at least 9% as western governments deal with threats from Russia and China, along with instability in the Middle East, a major oil supply region.

The UK government this week pledged to lift spending on weapons to 5% of GDP.

"This is a new era for defence. There is increasing recognition of the need to invest in defence capability and energy security, both to safeguard populations and to drive economic growth," said chief executive David Lockwood.

"Nations are increasingly focused on securing national sovereignty and industrial resilience, prioritising equipment and infrastructure modernisation, evolving technologies and the need to work in partnership with industry."

"These trends are likely to drive significant defence spending and increased investment in the civil nuclear sector for the foreseeable future."

Revenues at its nuclear division jumped 19% to £1.816bn driven by the expansion of new civil projects.

"The shift in foreign policy under the Trump administration is pushing European countries to up their military spending, although much of this will be yet to come through, so the fact Babcock is already seeing improved trading is encouraging," said AJ Bell investment director Russ Mould.

"Some eyebrows may be raised at the decision to launch the company's debut share buyback when its share price is at its highest level in more than a decade and not a million miles off its all-time high from 2014. Although, in fairness, this is merely following the recent trend for UK companies to return an increasing proportion of the capital they dole out to shareholders this way."

Reporting by Frank Prenesti for Sharecast.com