Babcock slumps on RBC Capital downgrade

The bank said that while a market-leading position, high barriers to entry and a long-dated order book should make the company an interesting investment proposition, it's telling that there's limited buying interest even on a CY19 price-to-earnings ratio of 8x.

"In our view, until we see both the board and outlook 'refreshed', it is difficult to envisage relative outperformance," RBC said.

The bank said that its positive stance was based on the strength of the group's relationship with the UK Ministry of Defence, the non-discretionary bias of the work it undertakes and the fact that these were not reflected in its rating.

"However, persistent 'financial discipline' concerns and negative earnings surprises have ensured that the stock de-rating has continued. Putting this into perspective, Babcock has now underperformed the FTSE All Share 50% over the past five years - despite an 11% compound annual growth in operating profits. On this basis, surely something has to give?" it said.

RBC said the stock's low valuation appears to reflect worries that the issues that have beset the likes of Capita, Carillion, Mitie and Serco - growth, accounting and balance sheet - are about to emerge at Babcock.

At 1000 GMT, the shares were down 5.2% to 586.80p.