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UK shares: this is why the Babcock International Group share price is sinking!

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The FTSE 250 is slipping again in Friday trading. It’s down the best part of 1% as I type following news that UK GDP dived 2.6% in November. A painful double-dip recession is now on the cards as Covid-19 lockdowns continue.

The FTSE 250’s drop in end-of-week trading is quite mild however. And it’s particularly gentle compared to the dip the Babcock International Group (LSE: BAB) share price has endured.

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The aerospace and defence giant has fallen 17% following the release of latest trading details. At 216p per share, Babcock is now trading within a whisker of late October’s decade-and-a-half-long lows.

Profit slumps by a third

Babcock declared on Friday that trading in the fiscal quarter to December “saw a continuation of trends in the first half of the year.”

It said that “weakness in our civil aviation businesses and a negative impact from Covid-19” had continued in the third quarter. And this pushed underlying revenue for the first nine months of this fiscal year (ending March 2021) 3% lower year-on-year at £3.4bn.

With difficulties at its civil nuclear insourcing operations adding extra stress, Babcock saw underlying operating profit collapse 34% during the nine months, to £202m.

Order intake for April to December meanwhile clocked in at £3.1bn. But the UK share’s total order book slipped to £16.8bn at the end of the period. This compares with £17.6bn at the start of the fiscal year.

Contracts review

News of the profits crash wasn’t all that spooked investors on Friday however. In other news Babcock warned that a review of contract profitability could spell fresh dangers for the balance sheet.

The UK share said: “Early indications suggest that there may be negative impacts on the balance sheet and/or income statement for current and/or future years.”

Babcock hopes to have the review, which is being supported by an independent accounting firm, completed when full-year results are published in May.

Net debt clocked in at £1.2bn at the end of 2020. This was down £255m from a year earlier but up significantly from £871m at the end of September.

Babcock withholds guidance again

Looking ahead, Babcock commented that “uncertainty remains around the outturn for this financial year.” This means the UK share continues to withhold financial guidance for the remainder of the period.

Explaining its decision, the UK share noted that “our fourth quarter is historically our strongest [and] the Covid-19 situation has worsened in most of our markets.” The review of contract profitability and its balance sheet encouraged it to withhold guidance again too.

City analysts expect Babcock will record a 40% earnings drop this fiscal year. Though current estimates suggest a 23% bottom-line rebound will transpire in financial 2022. Today’s share price crash leaves Babcock trading on a forward price-to-earnings (P/E) ratio of 5 times.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK 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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