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Stocks in Focus: Babcock International

This week I am looking at Babcock, the highly-specialised engineering support services group that delivers complex and critical support to the defence, emergency services, energy, Oil & gas, transport and education sectors. Last week it announced that Ruth Cairnie, a former executive of Royal Dutch Shell, would be taking over as Babcock’s Chair from Mike Turner, who is stepping down in July after 20 years on the board.

Ms Cairnie has considerable experience in the engineering sector, having held several senior roles within Shell and been involved in advising government departments on strategic developments. She also holds several external appointments including Non-Executive Director of the UK-listed companies Rolls Royce and ContourGlobal.

The appointment looks promising and investors will be hoping that a fresh perspective will bring about welcome direction to the business. Moreover, investors will be hoping for a recovery in the share price, which has performed poorly over the last five years on account of UK political uncertainty, concerns that tight defence budgets will lead to lower margins, and well-documented troubles amongst its peers in the outsourcing sector.

In contrast, management are confident that the outlook for the business is positive, believing that modest organic growth is possible whilst maintaining margins and increasing shareholder returns as debt reduces below their target range. Indeed, Babcock enjoys many positive investment characteristics. It has a well-entrenched market position and enjoys high barriers to entry thanks to the complex and sensitive nature of its work. Furthermore, the company is embedded in a wide range of long-term contracts and also has good visibility over its order book.

For the share price to recover, management need to prove that the business can deliver on their expectations. The Capital Markets Day in June will be a key opportunity for them to convince investors that the outlook is positive and the market is wrong to be so pessimistic.

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