British defence contractor Babcock confident on profit outlook

© Reuters.

By Sarah Young

LONDON (Reuters) - British engineering company Babcock is confident about future profit growth as it benefits from higher demand from defence customers due to the war in Ukraine and manages the impact of rising inflation.

Babcock, which helps maintain military equipment and provide military training, said it was on track to meet consensus forecasts for annual profit to rise 10% this financial year, helped by a turnaround plan and the geopolitical environment.

Russia's war in Ukraine had made governments focus on military readiness and that made them more dependent on Babcock's services, said chief executive David Lockwood.

"People are very concerned about readiness, which is basically availability and capability ... That is a big driver in the discussions we're having," he said.

Shares in Babcock, which have lost 18% of their value so far this year, rose 3% to 299 pence in early trade. The company is worth about 1.5 billion pounds.

Despite the positive demand outlook, Babcock is, like all businesses, facing headwinds from inflation which has hit 11% in Britain, the country which accounts for about 63% of its revenue and where its biggest customer is the Ministry of Defence.

Lockwood said Babcock agreed a pay deal with its unions earlier this year, which he said had focused on helping the lowest paid workers the most. He added that more than 70% of its revenue base had some protection against inflation, with the remainder exposed as they were fixed price contracts.

Other inflationary pressures would be offset through efficiencies, Lockwood said, highlighting a move to a single procurement function across the group which he said was beginning to bear fruit.

Babcock on Tuesday said underlying operating profit came in at 121.7 million pounds ($144 million) in the six-months ended Sept. 30. The full-year consensus forecast is for operating profit of about 262 million pounds.

($1 = 0.8452 pounds)