Babcock International Group PLC wins new Australian defence contract

Babcock International Group PLC (LON:BAB) (BAB.L) has released positive news flow today

Babcock International Group PLC
Babcock International Group PLC

Babcock International Group PLC (LON:BAB) (BAB.L) has released news today of a contract win. Its Naval Ship Management (NSM) joint venture with UGL has been awarded a new contract by the Australian Defence Force. It is worth around AU$1.5 billion for up to 15 years.

The contract is for an initial five years, with Babcock’s share for this initial period being AU$250 million, with the expectation for two further five-year extensions.

The partnering agreement sees NSM appointed Asset Steward of the largest vessels in the Royal Australian Navy. This is made up of two flagship Canberra Class Landing Helicopter Docks (LHD), as well as their 12 associated amphibious LHD landing crafts. The joint venture will commence work to sustain them in July 2019.

The contract award follows a number of other contract wins in the past with the Australian Defence Force. NSM also provides sustainment support to the Royal Australian Navy’s fleet of ANZAC class frigates, while Babcock also supports the Australian Defence Force’s ground support equipment.

In my view, the contract win is good news for the company. It shows that it continues to be competitive in winning new contracts, and this could help to improve its financial performance over the long run.

With Babcock’s shares having experienced a disappointing performance in recent months, it now has a single-digit P/E ratio. I think that this may suggest that it offers good value for money, with it seeming to have a margin of safety versus a number of its FTSE 350 industry peers.

Although there are fears surrounding the prospects for the world economy, the company is forecast to post positive EPS growth in both of the next two financial years. Therefore, with what seems to be a sound strategy, I think it could perform well in the long run. In the near term, though, its shares could continue to be relatively volatile.

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Robert Stephens is a CFA Charterholder and an Equity Analyst by trade. He is a passionate private investor who has been buying and selling shares for many years, owning a wide range of UK shares in the process. He has written for Citywire and The Motley Fool US and now runs his own business. To contact Robert, please email [email protected] or use one of the other contact methods available on the 'Contact Us' page