Babcock expects boom in military training demand on back of Ukraine war

Babcock International expects to benefit from higher demand for its training and support expertise as military forces focus on “readiness” and availability in the wake of the Ukraine conflict.

Britain’s second largest defence contractor, which builds warships such as the Type 31 frigate for the Royal Navy, generates the bulk of its revenues from support activities including maintaining equipment and providing training for the British army and other customers.

“Readiness is increasingly of importance to armed forces around the world,” said David Lockwood, Babcock chief executive. “They don’t necessarily have the people on hand to do the work to support availability, so outsourcing can be an attractive solution.”

Babcock, he added, had held talks with “potential customers looking to understand how we do it in the UK”.

The company has in recent months supported UK government-led efforts to help Ukraine on both training and equipment. Work has included preparing vehicles, which were donated by the UK government but kept in storage, to be combat-ready. The company has also provided training on specific equipment such as autonomous underwater mine hunting drones, which were donated to the Ukrainians earlier this year.

Although the financial benefit of Babcock’s support had been “positive but small” it had helped the group rebuild its reputation with the UK Ministry of Defence, according to Lockwood.

His comments came as he sounded a bullish note about Babcock’s prospects and hailed progress on a turnround plan despite facing higher labour costs.

Shares in the group were up almost 7 per cent in afternoon trading in London, although they remain down 20 per cent this year.

The company agreed a new pay deal for 2023 that targeted all but higher paid UK employees to help with the rising cost of living. Babcock said on Tuesday that it expected to offset the higher cost of the pay deal, which started in April, through operating efficiencies.

Its underlying operating profit for the six months ended September 30 was £121.7mn compared with £115mn in the same period the year before. Revenues climbed 5 per cent to £2.14bn. 

The company’s contract backlog through the period stood at £9.9bn. It improved its underlying free cash flow from an outflow of £160.6mn to an outflow of £24.7mn. It expects to turn free cash flow positive in the second half of next year.

Lockwood said moving into positive cash flow was “probably the sign of the next stage of the turnround if you are an investor”.

Babcock was part of an all-British consortium that lost out last week to a Spanish-led group in a competition to build three support ships for the Royal Navy. Lockwood said the company had yet to receive “detailed feedback” as to why the team did not win but played down the impact on its workforce at the Rosyth dockyard.

“We would not have bid if we could not have coped [with the work]. It is a shame we did not win but the UK chose to run an international competition.”