Babcock International's shares have been under pressure since last week's news of the £950m acquisition of helicopter company Avincis and a £1.1bn cash call to pay for it, amid concerns about the cost of the deal.
But they have been boosted by news that the engineering services group, alongside US partner Fluor, has been appointed preferred bidder for a £7bn, 14 year contract to manage the decommissioning of 12 UK nuclear sites.
The contract included old power stations such as Hinkley, Sizewell and Dungeness, currently under the ownership of Magnox and Research Sites Restoration. The Babcock/Fluor joint venture, Cavendish Fluor Partnership, will take ownership of Magnox and RSR. The formal award is planned for September, and the deal is expected to see savings of around £1bn in decommissioning costs. John Clarke, chief executive of the Nuclear Decommissioning Authority, said:
Cavendish Fluor Partnership brings a successful track record and extensive nuclear experience that will bring enormous benefits to the decommissioning and clean-up programme.
The news has seen a turnaround in Babcock's shares, which are now up 44p at £13.36 having earlier fallen to £12.77 and are leading the FTSE 100 risers. Analyst Kean Marden at Jefferies said:
It is anticipated that this contract will provide savings in excess of £1bn in the decommissioning programme for the 12 nuclear sites versus the £7bn initial estimate. This is in-line with our previous calculations and support our £200m-£250m annual revenue contribution estimate. Post the Avincis transaction and rights issue, we believe this should likely support mid-single digit upgrades to consensus earnings per share.
Babcock's nuclear revenue could quadruple to £1bn in 4-5 years. In our view, Babcock has enormous scope to increase its revenue from civil decommissioning and new build in the UK; from international decommissioning opportunities in France, Japan (Babcock's experience at Dounreay may be particularly useful at Fukushima) and Chalk River in Canada; and from the dismantling of laid-up submarines.
Losing consortia members include Amec, up 18p at £11.24, Rolls-Royce, 6p higher at £10.83 and Serco, up 1.1p to 421.7p.
