Barclays stays at 'equalweight' on Babcock, sees multiple drivers of underperformance YTD

Analysts at Barclays reiterated their 'equalweight' recommendation on shares of aerospace, defence and nuclear engineer Babcock, but trimmed their target price to 325.0p on lower free cash flow.

In their view, there were four main drivers of the shares' absolute 13% underperformance versus UK Defence peers year-to-date, which on average had jumped by over 40%.

The first of those was the company's indexation as a Support Services outfit, which meant that investors were failing to see the company as a defence conflict beneficiary over the short to medium-term.

Secondly, investors had sought refuge in value defensives for their near-term visibility on earnings and cash.

But Babcock was more exposed to wage inflation, had an average contract duration of five years and was negative to negative free cash-flow for 2023.

Thirdly, higher interest rates and worries around future costs had hit FTSE-250 stocks with leverage higher than their sector peers more.

On Barclays's estimates, Babcock was trading on 1.7 times' estimated net debt-to-earnings before interest, taxes, depreciation and amortisation.

Last, there was a preference within the sector for company's making money in US dollars, whereas only 5% of Babcock's sales were in US dollars.

Babcock was due to issue its half year figures on 18 November.