Babcock shares slide after warning that profit and revenue to fall

By Elisabeth O'Leary

EDINBURGH (Reuters) - British engineering services group Babcock said on Wednesday it expected revenue and underlying operating profit to fall in 2019/2020 as it reshapes its business in response to a tough domestic market.

Babcock shares tumbled more than 9 percent by 0825 GMT, touching their lowest levels so far this year and taking the decline over the past year to almost 40 percent.

Government contractors have been hit by a slowdown in decision-making because of Britain's impending exit from the European Union, which has forced a strategy rethink by Babcock whose structure has become increasingly complex.

"As we begin the new financial year we do not expect the wider market environment to be any less challenging than we have experienced this past year," said CEO Archie Bethel, who has been in the role for almost three years.

Babcock, whose biggest customer is Britain's Ministry of Defence, announced flat full year profit before tax of 517.9 million pounds in the year to March 2019 on a 4% decline in revenues as a cost-cutting effort helped it offset difficult operating conditions.

The group is simplifying its structure and will exit several businesses such as civil infrastructure. It will end its Magnox nuclear power decommissioning contract and scale back its South African power operations.

This will mean underlying profit before tax is expected to fall by up to 12 percent in 2019/2020.

It will hold an investor day on June 5 to give more details of its plans to focus on its business in defence, aerial emergency and civil nuclear.

NEW CHAIR

Babcock, which also maintains nuclear submarines and army vehicles in Britain and abroad, has lost investor confidence due to doubts over management and strategy. In April it announced Ruth Cairnie would take over from Mike Turner as chair in July.

One analyst welcomed a change in focus.

"Babcock remains exposed to current contract hiatus from UK government, as per other outsourcers, but its focus on essential infrastructure and a growing exposure to overseas contract work is set to deliver a return to growth in due course, in our view," said Robin Speakman of Shore Capital.

Speaking to Reuters, CEO Bethel predicted that once the sale of some units had taken place this year, underlying profit growth would return to around 3 percent after 2021.

He saw growth in international defence and aerial emergency services while returns from the group's British defence business would be flat or modestly higher.

Babcock forecast underlying revenue of around 4.9 billion pounds in 2019/2020. Underlying operating profit of 515 million to 535 million pounds would fall from 588 million pounds in 2018/2019.

(Reporting by Elisabeth O'Leary; editing by Kate Holton/Keith Weir)