Brexit and Covid beset Royal Navy contractor as profits plunge | Babcock International
One of the UK’s biggest defense contractors has blamed Brexit and Covid among a series of problems that have torpedoed a key Royal Navy contract, causing its annual profits to fall.
Babcock International’s profits fell by almost a fifth in the year to the end of March as the company reported a fee of £140 million under a contract to build five Type 31 frigates for the Royal Navy.
The company, which reported a 19% fall in underlying operating profit to £293.3 million, said the contract it won in 2019 contained only “certain escalation clauses” to protect it from cost increases associated with building the frigates.
“Brexit provided limited protection against macroeconomic changes related to Covid, raw material prices and labor shortages in the UK, which have significantly increased our costs in recent years,” the company said. “This resulted in a loss on the contract, with an increase in estimated costs due to design maturation and estimated labor cost.”
The company had to make final changes to the designs of the first two ships in the five-ship fleet.
The company’s shares fell more than 3% Monday morning.
Defense contractors are waiting for the government to release its long-awaited defense investment plan. Earlier this month, defense secretary John Healey resigned following a row with Keir Starmer over the plan.
But Babcock said: “While some governments are balancing these priorities against fiscal constraints, the long-term trend remains clear, as reflected by the delayed publication of the UK’s defense investment plan.
“Demand is becoming increasingly structured due to the need for more advanced, adaptable and integrated capabilities.”
Babcock has published an “illustrative” scenario for the impact on frigates’ construction costs if its current estimates change. The company said a 10% increase or decrease in estimated production hours would increase or decrease its losses by £29 million.
A six-month delay in the production schedule will increase the loss on the contract by £15 million. A 10% increase or decrease in the average labor rate would increase or decrease the loss by £34 million.
Babcock said its operations in the nuclear and aerospace sectors had performed strongly and, after scrapping the loss-making Type 31 contract, the company had increased operating profits by 19% to £433 million.
“In an increasingly uncertain geopolitical environment, Babcock has made continued strategic and operational progress,” said Babcock CEO David Lockwood, who will leave the job at the end of the year.
“We have achieved strong underlying growth, improved margins and strong cash generation while securing significant contract wins that further strengthen our position in the defense and nuclear markets where long-term demand is increasingly structured.”
Babcock has forward contracts worth £9.8bn, compared to £10.4bn the previous year, with new wins including the expansion of its partnership with HII, the US’s largest military shipbuilding company, to include its nuclear submarine programme.
Aarin Chiekrie, an analyst at Hargreaves Lansdown, said Babcock was underestimating the long-term impact of the frigate contract, adding: “Governments around the world are focusing more on developing defense capabilities and Babcock looks well positioned to benefit from this long tailwind and capture some of this extra spending.”
