Babcock International Group (LON:BAB) executives said the defense contractor delivered a strong underlying performance in fiscal 2026, but the update was overshadowed by a new GBP 140 million charge tied to its Type 31 frigate program.
Speaking on a post-close trading update call, Group CEO David Lockwood said the company remained in a closed period and was not providing a full results presentation. Even so, he described the year as “really strong” across the underlying businesses and said Babcock had exceeded its prior mid-single-digit growth guidance.
“What we do in defense and security is still really relevant,” Lockwood said, adding that Babcock’s core activities should remain relevant “for at least a decade” and likely longer.
Underlying revenue, profit and cash generation improve
Chief Financial Officer David Mellors said organic revenue grew 10% before the impact of the Type 31 charge. He said the growth was driven by strong performances in nuclear and aviation, where revenue rose 14% and 34%, respectively. Marine revenue increased 8% on a constant currency basis, while land revenue declined 3% overall but returned to growth in the second half.
Underlying profit increased 19% to GBP 433 million before the Type 31 charge, from GBP 363 million, producing an 8.2% margin, up 70 basis points from fiscal 2025. Mellors said operating profit improved across all sectors before the Type 31 impact, including increases of 23% in nuclear, 10% in land, 52% in aviation and 15% in marine.
Margins also improved across the business. Nuclear margin rose to 9.5%, land increased to 8.8%, aviation rose to 7.1% and marine improved to 6.5% before the charge.
Mellors said underlying free cash flow reached GBP 262 million, supported by 85% underlying operating cash conversion before the Type 31 charge, ahead of the company’s medium-term average target of 80%. He said the balance sheet remained strong, with net debt of GBP 329 million and gearing of 0.2 times.
Company announces new GBP 200 million buyback
Babcock said it plans to begin a further GBP 200 million share buyback after its preliminary results, to be executed during fiscal 2027. The program follows a recently completed GBP 200 million buyback.
Mellors said the decision followed a review of the company’s year-end balance sheet and short-term investment pipeline under its capital allocation policy. Lockwood said Babcock continues to assess potential acquisitions but remains disciplined.
“There are a couple of things that are ongoing,” Lockwood said, describing them as “regional and capability bolt-ons.” He added that Babcock would not “destroy shareholder value” by overpaying in a market where some assets were being offered at high prices.
Type 31 charge reflects rework and revised risk assumptions
The company said the GBP 140 million Type 31 charge represents a full re-estimate of the program following recent performance. Mellors said the accounting impact is expected to include about GBP 100 million of revenue reversal and about GBP 40 million as a charge within the income statement. The charge will be recognized in fiscal 2026, while the cash costs will be incurred over the life of the program.
Lockwood said the Type 31 program still aims to deliver “certainly Europe’s and possibly the world’s most affordable, most capable general-purpose frigate,” but he acknowledged that the route to that outcome had been difficult. He described the first ship as effectively a prototype used to debug engineering and production issues.
Lockwood said Babcock had identified a need for rework, particularly in outfitting, which led to updated drawings, added cost and a reassessment of risk contingency. He said some issues were more expensive to fix because they required work “deep into the ship.”
“It is really disappointing,” Lockwood said. “It’s not what I would have wanted in this year.”
In response to analyst questions about visibility on the program after prior charges, Lockwood said Babcock now has more fact-based data from work on the first ship. He said earlier assumptions were more heavily based on bid and design assumptions made before and during the COVID period. He also said Babcock is seeking to reduce “concurrency” by deconflicting engineering, build, outfitting and combat systems integration as much as possible.
Outlook unchanged with 70% revenue cover for FY2027
Mellors said expectations for fiscal 2027 remain unchanged. He said Babcock started the year with around 70% of fiscal 2027 revenue under contract as of April 1, a level he described as a good starting point and similar to the prior year.
The company also reconfirmed its medium-term guidance for average revenue growth of mid-single digits, underlying operating margin of at least 9% and underlying operating cash conversion of at least 80%.
Analysts asked whether the Type 31 cash impact could affect cash conversion targets. Mellors said the cash cost “won’t help,” but added that it would be spread over the life of the program and was “not big enough” to knock the company off course.
On fiscal 2027, Mellors said Babcock was not yet changing its expectations despite the potential timing benefit from Indonesian license fees moving from fiscal 2026 into fiscal 2027. He said the company still has 30% of revenue to “book and bill” for the year.
International and defense pipeline remains active
Lockwood pointed to several strategic opportunities and recent developments, including the company’s relationship with Saab, work with HII related to AUKUS and Virginia-class submarines, and activity in Indonesia. He said Indonesia represented a “whole government effort” involving multiple cabinet ministers and the president, with momentum to bring a broad program under contract.
Lockwood also highlighted initial orders for Babcock’s General Logistics Vehicle, which he described as the Land Rover replacement vehicle and said has “huge potential,” with Babcock serving as Toyota’s global partner. He also cited progress in civil nuclear, including a joint venture role as the government’s owner’s engineer partner for small modular reactors.
Asked about the business pipeline presented to investors last November, Lockwood said there had been no single “headline grabbing” award, but said the company had won smaller opportunities and built momentum across civil nuclear, marine, land and aviation. He also said the timing of the U.K. Defence Investment Plan remains an important factor for some programs.
Lockwood said discussions around the submarine portion of the Future Maritime Support Programme should not be affected by the Defence Investment Plan because nuclear funding remains ring-fenced. He said there were no major disagreements with the government on the intended direction of the contract structure.
Babcock said its preliminary results will provide more detail after audit review and approval by the audit committee.
About Babcock International Group (LON:BAB)
Babcock International Group PLC, together with its subsidiaries, provides value-add services for aerospace, defense, and security in the United Kingdom, rest of Europe, Africa, North America, Australasia, and internationally. The company operates through four segments: Marine, Nuclear, Land, and Aviation. It designs, procures, operates, and manages critical utility and process equipment; offers asset management, defense and maritime training, information and intelligence, equipment and system, and facilities and infrastructure services, as well as naval platforms; and designs, manufactures, and provides through-life support for mechanical and electrical systems and equipment.
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