Babcock outlines medium-term targets, sees 3% to 4% earnings growth

FTSE 250 aerospace and defence group Babcock International said on Wednesday that it expects to see earnings growth of 3% to 4% in the medium term.

In a statement ahead of its annual meeting, the company set out its medium-term targets for the period beyond the year ending 31 March 2020.

It expects earnings of 3% to 4% compound annual growth rate and for margins to be sustained at around 11%. In addition, it plans to increase cash flows each year in line with earnings and to generate around £1.4bn of free cash flow over the next five years.

Babcock said it will continue to reduce net debt and increase flexibility. It also intends to improve its return on invested capital and have a sustainable dividend.

The company will focus on defence, emergency services and civil nuclear, and aim to grow revenue from these markets from around 75% of group revenue to more than 85%. It will also look to grow international revenue from 30% of group revenue to 40% and to develop multi-sector, multi-market opportunities in Australia, Canada, France and Spain.

Babcock also announced a change to its naval nuclear business. This was part of its marine sector but has now been combined with Cavendish Nuclear to create a new nuclear sector, under a single management team led by Simon Bowen.

"This optimises alignment with our primary customers in both the defence and civil nuclear areas and creates one nuclear business that will share resources and operate under the regulatory environment managed by the Office for Nuclear Regulation," it said.

RBC Capital Markets analyst Andrew Gibb said the targets were "uninspiring".

"Nothing ground-breaking here, whilst a 3-4% EPS growth target is hardly exciting. Given management have been unable to hit shorter-term numbers of late, and the resultant negative EPS momentum, we think the market is unlikely to get over-excited despite the lowly valuation."

At 0817 BST, the shares were up 2.5% at 475.40p.