Numis upgrades Babcock to ‘buy’, cites brighter outlook

Numis upgraded Babcock on Wednesday to ‘buy’ from ‘hold’ and hiked the price target to 530p from 325p, citing "a brighter outlook, healthy order intake, achievable targets and still relatively undemanding valuation".

Numis pointed out that Babcock now derives around 70% of its revenue from its core defence market, up from around 55% in FY21, reflecting the disposal of several non-core assets in other markets during the last three years.

It said there has been a more marked skew of the contract backlog towards defence and noted a marked increase in commercial momentum within the defence space over the last 12-18 months, particularly in terms of new partnerships signed with defence sector peers.

"Whilst budget challenges remain prevalent, the wider backdrop of increased defence spending by western nations should offer a supportive backdrop to Babcock from a top-line perspective," Numis said.

It also pointed to an improved operating performance, saying that recent periods have seen a steady improvement in operating margin and free cash flow, with debt and leverage both reducing markedly over the last two years.

"We would expect further reductions in debt and leverage over time driven by positive FCF, and further margin uplift aided by the reduction in low-zero margin programme revenue over the next few years," Numis said.

At 1140 GMT, the shares were up 0.6% at 440.20p.