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Are Babcock shares primed for recovery after today’s results?

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Babcock International (BAB) has had its problems in recent times. Today’s half-year results announcement could show if recent major changes at the company have benefitted it and if the shares could be a good investment for my portfolio.

As I write, shares are trading for 309p. A year ago shares were trading 1% higher at 314p. The shares did rally earlier this morning to 321p after its report was released.

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Aerospace, defence, and security

Babcock is an UK-based international aerospace, defence, and security business and operates marine, naval, land, and aviation divisions. It has a footprint in Canada, Australasia, and South Africa, as well as other key markets.

Aviation and defence spending is a lucrative market. Many governments can often continue spending on such things even in times of austerity. Babcock shares have unfortunately fallen out of favour with investors recently. Accounting problems and leadership issues have led to a loss of investor confidence. Since these challenges arose, a change in leadership and a thorough accounting review could mean a recovery is underway. 

Recent performance and outlook ahead

Babcock’s strategy has refocused the business under new leadership. This has resulted in the sale of some of its business to streamline operations as well as the accounting review mentioned, which saw some past results restated. 

So has this change in tack benefitted Babcock? Based on HY results announced today, it seems to be the case so far. It reported revenue had increased from £2054m in the same period last year (although these figures were restated after the accounting review) to £2,223m. Losses reported last year turned into an underlying profit of £115.3m this year. Net debt had also decreased, which is always positive.

Babcock pointed to a strong contract backlog worth over £10bn, especially linked to its maritime division. It recently signed an agreement with the UK’s Ministry of Defence worth £3.5bn. In addition, the ongoing sale of smaller businesses will continue to help it save money and streamline operations. Additional positives from the report were further contract wins worth over £700m in the half-year period.

Babcock shares have risks

Babcock’s results are positive but there are still credible risks worth noting before I invest. Firstly, it notes supply chain issues and rising inflation as potential threats to achieving forecasted full-year results. These are common macroeconomic pressures a lot of firms are experiencing issues with right now. Furthermore, Babcock seems to be on the right track once more but there is still lots of work to do to streamline operations and continue growth and winning new business. History teaches me this can be a long and tedious task, which could affect performance as well as investor sentiment and returns.

I think Babcock shares remain a risky prospect, so I would not buy shares for my portfolio at the moment. It seems the new leadership team has got its house in order but there is a long way to go and macroeconomic issues to contend with too. Right now, I will sit on the sidelines and keep an eye on developments.

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Jabran Khan has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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