February 6, 2018 / 7:35 AM / a year ago

Babcock trims revenue forecast, savings protect profit

EDINBURGH (Reuters) - British engineer Babcock (BAB.L) trimmed its 2017-18 revenue forecast on Tuesday due to slower demand in the oil, gas and defence sectors, the latest blow to the country’s outsourcing industry.

However the company, which provides specialist support and services to groups including Britain’s Ministry of Defence, said it would meet its earnings forecast after cost savings helped it to boost the profit margin on its work.

Its shares were down 2.2 percent at 0900 GMT, after a 20 percent slide in the past three months and against a near 3 percent fall in Britain's main FTSE 100 share index .FTSE.

That stock decline is similar to several rivals which have struggled to provide a raft of problematic contracts and have been hit by a slowdown in business decision-making due to uncertainty over Britain’s exit from the European Union.

The collapse of construction and support services group Carillion in January, and a big profit warning from outsourcer Capita (CPI.L), have also sent shockwaves through the sector.

Babcock says its focus on large public contracts which provide essential services protect it to a large extent from uncertainty, and mean it is more dependent on maintenance work with current contract-holders than additional new spending.

Asked about the current climate in outsourcing, Chief Executive Archie Bethel said: “I think it’s really, really difficult, and it’s having a major impact on (sentiment). We can only emphasise we are not Carillion, we are not Capita, there are all kinds of things that set us apart.”

“We are not running payrolls, cutting grass or looking after buildings, we are running critical infrastructure,” he told Reuters.

Babcock said its short-term pipeline of bids remained strong, and 80 percent of expected orders were already in place for the year to March 2019, meaning it could keep its profit guidance with confidence.

“We’ve increased margins, and we are heading for another really good year,” Bethel said.

Babcock said it now expected revenue for the year to March 2018 of 5.3-5.4 billion ($7.4-$7.6 billion), compared with analysts’ average forecast of 5.41 billion pounds.

“We have indicated that revenues will be slightly lower than forecast but that’s really due to timing issues, we do have a lumpy business and that happens, but none of it is due to cancellations, it’s due to timings,” Bethel said.

He said a major marine project with Britain’s defence ministry and BAE (BAES.L) to provide support to aircraft carriers had been slightly slower and more complex to get started, but was now underway.

Although Babcock is much less dependent on discretional spending than peers such as Capita and Serco (SRP.L), its shares have been hit by the uncertainty in the outsourcing sector and concerns about a squeeze on defence-related spending.

Bethel said he saw “no serious prospect” of less British defence spending, but was not expecting a boost either.

Reporting by Elisabeth O'Leary; Editing by Kate Holton and Mark Potter

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