March 7, 2017 / 12:39 PM / 8 months ago

Babcock CEO sees pressure for more defence spending

EDINBURGH (Reuters) - British engineering outsourcer Babcock (BAB.L) expects to benefit from U.S. President Donald Trump’s demand that NATO members spend more on defence, helping it to avoid the turmoil hitting peers who are winning fewer contracts after Brexit.

Chief Executive Archie Bethel said Babcock, which maintains Britain’s nuclear submarines, had not seen any delay in contracts after last year’s vote to leave the European Union, and expected the election of Trump to boost defence spending.

“The benefit we have is that the bulk of our business, 40 percent, is with the (UK) ministry of defence and that is the one department that is unaffected by Brexit,” Bethel told Reuters.

“No one is talking about leaving NATO (North Atlantic Treaty Organisation) and in fact they are getting pressure from the Americans, the main member, to increase the defence spend, not decrease it.”

Britain’s outsourcing market, the second biggest in the world behind the United States, has been hit in recent months by clients in the private and public sector delaying new spending decisions, leading to profit warnings from the likes of Capita (CPI.L) and Mitie (MTO.L) who provide a wide range of administrative services.

Babcock offers engineering and technology-related services to the defence, energy, emergency services, transport and education sectors, and more than three quarter of its revenue comes from the UK. Revenue is predicted at 4.8 billion pounds ($5.85 billion) in the year to March 2017, according to Reuters estimates.

The company is gradually increasing the share of its revenue that comes from abroad, but Bethel said the group was not looking to ramp that up more aggressively than already stated, despite the uncertainty sparked by Brexit.

Babcock said last week it had entered the fourth quarter with its order book and bid pipeline maintained at its half-year level of 30.8 billion pounds.

Debt, forecast to fall to 1.8 percent times earnings before interest, taxes, depreciation and amortisation for 2018 and roughly 1.5 times next year from around two times now, was on the right track, Bethel said, adding it was too soon to talk about returning cash to shareholders.

Acquisitions had to be the exact fit for a company which he said had rejected about 20 potential purchases in the last year.

”There’s no doubt that if the growth (of the market) slows we’ll produce cash, that’s what happens, and if the acquisitions that suit us aren’t there then paying back cash to shareholders is one way of doing it.

“But we’re not there yet.”

($1 = 0.8203 pounds)

Reporting by Elisabeth O'Leary; editing by Susan Thomas

Our Standards:The Thomson Reuters Trust Principles.
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