Babcock defies defence cuts as profit soars

LONDON Tue Nov 12, 2013 10:05am GMT

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LONDON (Reuters) - Engineering contractor Babcock posted a 17 percent rise in profit in the first half of the year, helped by a scheme to share cost savings with government on deals to maintain navy submarines and warships at a time of defence cuts.

Pre-tax profits at the FTSE 100 firm rose to 141.7 million pounds ($226.3 million) in the six months to end-September on revenue of 1.7 billion pounds, up 9 percent on last year.

This was mainly due to higher activity on existing contracts to maintain British and Canadian submarines, work on a British air tanker and aircraft carrier, as well as the start-up of an Australian warship refit.

Babcock gets just over half its revenue from Britain's Ministry of Defence (MOD), which will suffer an 8 percent cut in real terms between 2010 and 2015. The cuts are back loaded, meaning the biggest budget squeeze will be between 2013 and 2015.

Shares in Babcock hit an all time high earlier this month, seemingly defying the backdrop of austerity and greater scrutiny of public contractors in Britain.

Babcock Chief Executive Peter Rogers, who has run the firm for more than a decade, attributes its success to how it has structured its deals with government.

"It meant that you were incentivised to deliver savings early rather than save up some of your ideas for the next rebid," Rogers said in a telephone interview.

Rogers said he could see no reason why MOD cuts would be a problem for the business in the future.

Babcock's 12 billion pound order book and 15.5 billion pound bid pipeline were unchanged from its update in May. The firm now wins 45 percent, almost one in two, of all the work it bids for.

The largest upcoming contract award by far is the 4-5 billion pound deal to decommission Britain's Magnox nuclear reactors, expected in March 2014.

Rogers said the firm, which has teamed up with U.S. engineering firm Fluor on its bids, has spent around 5 million pounds bidding for the deal.

He said Babcock's public sector contracts were "open book", meaning that government knows the costs and profits on all work, countering a review by the government auditor that Britain's use of big companies raised questions about the levels of transparency and competition.

He added that some kinds of work were less competitive than others, but that was to be expected in specialised areas such as nuclear decommissioning.

Shares in Babcock were down 1 percent by 0925 GMT to 1277 pence, compared to the wider FTSE which was down 0.48 percent.

(Reporting by Christine Murray; Editing by Brenda Goh and Elizabeth Piper)

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