Babcock eyes expansion but sees no quick fix for ‘nightmare’ year

February 6, 2019

By Elisabeth O’Leary and Kate Holton

LONDON (Reuters) – Britain’s Babcock aims to expand its foreign business but will not chase risky growth to resolve a “nightmare” period in which the engineering group’s management and stock price came under fire, Chief Executive Archie Bethel said on Wednesday.

Babcock, a key supplier of engineering and defense services to Britain’s Ministry of Defence with around 5 billion pounds ($6.47 billion) in annual revenue, has lost 25 percent of its stock market value in the past six months.

Providing services ranging from the maintenance of nuclear submarines to aerial fire-fighting across Europe, Babcock now needs to rebuild its reputation and repair ties with investors.

“There is no quick route that’s safe,” Bethel, himself an engineer, told Reuters. He said he would not pursue radical options such as breaking up the group, although certain small assets could be considered for sale, such as a railway unit.

He believes part of the century-old group’s share weakness is due to investor fears about Britain’s exit from the European Union, the world’s largest trading bloc, and contagion around UK outsourcing after last year’s collapse of contractor Carillion.

But the height of Babcock’s woes came with a report published last October by an unknown research group called Boatman, which questioned Babock’s relationships with the British government, its accounting and its senior management.

Bethel said his “own personal view” was the anonymous report was linked to a decision to close a shipyard in Devon. “This report included many false and malicious statements which the group strongly refutes,” it said at the time.

“We’ve had a nightmare six months,” The 65-year-old Scot said. “Not in performance or trading, that’s been fine. It’s nothing to do with business, but we’ve always prided ourselves as being able to sail below the surface.”

Bethel said he accepted that growth had slowed, because no company could grow rapidly forever, but Babcock remained entrenched in the supply chain of customers and had the potential to grow abroad.

“I still think 2, 3, 4 percent growth is hardly the end of the world,” he added.

The group had aimed to have 30 percent of its revenue coming from outside Britain by 2022, but having achieved that target already it may set a new target later this year.

“International is not an easy route, we’re not interested in dangerous countries,” he said.

Asked about the possibility of disposals, he said he could sell a few small businesses that do not fit within the group’s main areas of focus, but that he was in no rush.

Fears about Britain’s exit from the EU and the impact it will have on trade was behind the share’s weakness, Bethel said.

Added to that was uncertainty about what would happen if opposition leader Jeremy Corbyn became prime minister, a known critic of the outsourcing of public services to private firms.

“The last couple of years have been tough because we’ve seen a lot of the American (investor) side not move out but sell down, which was Brexit related, Corbyn related, sector related.”

In dozens of meetings with investors Bethel said he had had no consistent argument about what they were unhappy with. But the Boatman report unnerved investors and in January chairman Mike Turner said he would step down after a decade at the helm.

Bethel said he felt no pressure to quit himself and had not been urged by investors to do so. He added that a new chairman would not need to shake up the board.

“Staid is good as long as we make the profit and the cash.”

(editing by David Evans)

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