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Babcock sinks as it continues to withhold guidance, profits drop by a third

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Babcock International Group PLC (LON:BAB) has said it will 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.

In an update 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 £202mln, down 34% year-on-year, while revenues in the period fell 3% to £3.4bn.

READ: Babcock International holds fire on dividend as profits plunge

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 £3.1bn and that its order book as of December 31 was £16.8bn compared to £17.6bn at the end of March last year.

The company also said that it has recently started a “detailed review” of its balance sheet and contract profitability amid early indications which suggested there may be “negative impacts” on its balance sheet or its incomes in the current and future years. Meanwhile, Babcock also said a review of its strategic priorities announced in November was “well underway” and that a refreshed strategy will be outlined at its full year results.

Looking ahead, Babcock said “uncertainty remains” around the outturn for its current financial year, particularly as it entered its historically strong fourth quarter with the COVID-19 situation having worsened in most of its markets.

“Given this uncertainty, and the start of our review of contract profitability and balance sheet, we continue not to provide financial guidance for this financial year”, the company said.

“While trading in the third quarter has continued to reflect the challenges of the first half and there remain a number of near term uncertainties, the fundamental strengths of the group and the opportunities ahead give us confidence for future years and I look forward to reporting back at the full year results”, added Babcock chief executive David Lockwood.

In a note on Friday, analysts at Liberum cut their target price on the group to 350p from 400p and retained their ‘buy’ rating, saying the update guided to “weakness in Q3 and [tough comparatives] in Q4”.

The broker also forecast that earnings (EBIT) for the company’s fourth quarter will come in at £98mln, a sharp drop from £204mln a year ago.

Meanwhile, analysts at Shore Capital downgraded the stock to ‘hold’ from ‘buy’, saying that immediate newsflow for the firm “remains challenging” and that they were unable to sustain a buy rating due to the “negative immediate outlook for the balance sheet and profitability”.

Despite this, the broker said Babcock “remains a strategic supplier to its clients” and they “still expect the company to come through this difficult period in due course”.

Shares in Babcock tumbled 15.3% to 223.1p in late-morning trading.

–Adds broker downgrade and updates share price–

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