Baclays downgrades Babcock despite reduction in financial leverage

Analysts at Barclays downgraded their recommendation for shares of Babcock from 'overweight' to 'equalweight' due to the earnings dilution resulting from its recent disposals.

Furthermore, they pointed out that its financial leverage would remain above the average level for the sector despite those asset sales and others that were set to close soon.

Towards mid-August, the defence engineer sold its Marine division for £293m of proceeds at an EV/sales multiple of 2.8 times and its Oil and Gas unit for a further £10m in proceeds.

Combined, those asset sales would cut the company's earnings per share in 2022 and 2023 by approximately 6% and 12%, respectively, the analysts predicted.

In turn, net debt as a proportion of operatings earnings had reduced from 2.5 times in the 2021 financial year to 2.1 times.

So too however, Barclays marked down its target price for the shares from 424.0p to 352.0p.

Babcock had yet to finalise the disposal of its 15.4% stake in the Air Tanker Holdings joint venture.

Completion of that sale was expected to occur in the back half of 2022, for £95m net to Babcock, lowering its leverage further still, to roughly 1.9 times its earnings before interest, taxes, depreciation and amortisation.

Yet while Babcock had set itself a target for net debt of less than 2.0 times earnings, that would remain above the UK defence sector average of 1.0 times.