Babcock International Group PLC (LON:BAB) saw its shares sink on Wednesday after analysts at Barclays double-downgraded its rating for the defence contractor to ‘underweight’ from ‘overweight’ as they feel risk overhang is likely to discourage investors near term on a relative basis, with a capital raise likely
The bank’s analysts also slashed its target price for the FTSE 250 listed firm’s shares to 145p from 347p, with the stock currently trading at 207.10p, down 4.7% on Tuesday’s closing price.
In a note to clients, the Barclays’ analysts said: “In our view, uncertainties such as outlook/balance sheet/earnings reset, as well as the absence of guidance, will prevent many investors entering or holding the shares near term despite an optically attractive valuation.
“BAB has material debt (2.7x 2021E ND/EBITDA on a covenant basis vs 1x UK defence average), leaving the equity value highly sensitive to FCF generation.”
The analysts chopped their full-year earnings per share forecasts for Babcock by 35% for both 2021 and 2022 and by 24% for 2023, and said they are materially lower than consensus free cash flow (FCF) forecasts.
In an update on January 15, 2021, Babcock said it would continue to withhold financial guidance for its current year after reporting more weakness in its civil aviation business due to the coronavirus (COVID-19) pandemic.
For the first nine months of its current financial year ending March 31, 2021, the aerospace and defence firm reported that underlying operating profit was GBP202mln, down 34% year-on-year, while revenues in the period fell 3% to GBP3.4bn.
Babcock said profits had suffered a “negative impact” from civil nuclear insourcing, COVID-19 and civil aviation, adding that order intake in the year-to-date was GBP3.1bn and that its order book as of December 31 was GBP16.8bn compared to GBP17.6bn at the end of March last year.