Babcock Downplays Concerns Over U.S. Commitment to Aukus Security Pact
The U.S.-launched review of the alliance has sparked investor concerns
Key Points
- Babcock International downplayed concerns regarding the U.S. commitment to the Aukus submarine deal with the U.K. and Australia.
- Babcock reported increased revenue and operating profit due to rising demand for defense and nuclear energy equipment in the U.K.
- Babcock launched a share buyback program and anticipates achieving its margin target early, driven by increased defense spending.
Babcock BAB 11.81%increase; green up pointing triangle International downplayed widespread concerns about the U.S. commitment toward a multi-billion dollar submarine deal with the U.K. and Australia, aimed at countering China’s rise in the Indo-Pacific.
The U.S. administration has launched a review of its participation in the three-way alliance, known by the acronym Aukus, which is aimed at providing Canberra with nuclear-powered submarines while jointly developing other cutting-edge technologies for warfare. U.S. officials have recently argued that the security alliance must fit President Trump’s “America First” agenda.
David Lockwood, chief executive of Babcock, one of the companies expected to benefit from Aukus contracts, said in a call with investors on Wednesday that it isn’t unusual for an administration to review a defense program.
“I think it is a natural thing to do. Nothing we are hearing from our U.S. partners I would describe as worrying at the moment, but they are just only starting the review,” he said.
The review has sparked concerns among investors in the companies involved in Aukus as well as U.K. and Australian officials, since Britain will play a big role in building the new submarines and for Australia the deal represents a major upgrade to its military capabilities. Babcock is involved in Aukus as a supplier of components for the submarines that will be built throughout the 2020s and 2030s, and its participation has supported the group’s shares.
Lockwood’s comments came after Babcock reported higher revenue and underlying operating profit for its fiscal year amid growing demand in the U.K. for defense and civil nuclear-energy equipment.
Shares in Babcock jumped 13.65% in early morning trade in London, trading at 11.73 pounds.
The British defense company–a major contractor for the U.K. government–on Wednesday reported revenue of 4.83 billion pounds ($6.58 billion) for the year ended March 31 compared with 4.39 billion pounds the year before.
Underlying operating profit–a metric that strips out exceptional and other one-off items and is Babcock’s preferred metric of profitability–jumped to 362.9 million pounds from 237.8 million pounds. The underlying operating margin was 7.5%.
Consensus estimates published by Babcock in June forecast revenue of 4.85 billion pounds, underlying operating profit of 356.1 million pounds and an underlying operating margin of 7.32%.
Western nations’ increased focus on defense capabilities and nuclear-power generation, in particular small modular reactors, is driving demand for Babcock’s products, Lockwood said.
The U.K., Babcock’s home market and the source of 62% of the group’s revenue, is committed to increasing its military spending to 3.5% of gross domestic product for core defense and allocating an additional 1.5% of GDP for resilience and security improvements by 2035.
The FTSE 100 company is involved in the delivery of the U.K.’s nuclear deterrent, which the Labour government has confirmed as a national-security priority, and the Hinkley Point C nuclear power station under construction in Somerset, England.
The group has also benefited from the war in Ukraine, as it supports the U.K. donations of military equipment to the Eastern European country and the training of Ukrainian troops.
“The shift in foreign policy under the Trump administration is pushing European countries to up their military spending, although much of this will be yet to come through, so the fact Babcock is already seeing improved trading is encouraging,” said Russ Mould, investment director at AJ Bell.
The Type 31 frigate program, aimed at delivering five multipurpose warships to the British Royal Navy, is making good progress, with work starting on the third ship, the company said. The first ship entered the water after the year end, it added. The program had been hit by increased labor costs and delays due to design changes.
Babcock’s contract backlog rose to 10.4 billion pounds from 10.3 billion pounds the previous year.
The group now expects to achieve its previous medium-term target of an underlying operating margin of at least 8% one year earlier, in the current fiscal year.
It also set new medium-term targets. Average revenue growth should be a midsingle digit, while the underlying operating margin should surpass 9%, it said.
Babcock surprised with the launch of a 200 million-pound share buyback program to be completed in fiscal 2026, which was completely unexpected and likely to be very well received by investors, said J.P. Morgan analyst David Perry.
“We think the share buyback program illustrates that Babcock is now a high quality, cash generative company…a far cry from the company of five years ago,” Perry said, describing the British group as one of the most under-valued European defense companies.
The decision to launch a share buyback was partly motivated by Babcock walking away from well-advanced negotiations for two acquisitions in fiscal 2025 because of “very, very good reasons,” Lockwood said. Investors shouldn’t give for granted that there will be a share buyback program every year, he cautioned.
The board recommended final dividend of 4.5 pence a share, taking the total to 6.5 pence a share, up 30% on year.