Last Update 05 Dec 25

Fair value Increased 2.67%

BAB: Medium-Term Prospects Will Improve As Long-Term Defence Contracts Mature

The analyst price target for Babcock International Group has been raised from £14.50 to £15.00, as analysts cite sustained revenue growth expectations and slightly higher valuation multiples despite a modestly lower projected profit margin.

Analyst Commentary

Bullish analysts highlight that the successive price target increases reflect rising confidence in Babcock International Group's ability to deliver on its medium term growth plan, even as margin expectations normalize.

They point to the uplift to 1,500 GBp from 1,450 GBp by JPMorgan as confirmation that the market is reassessing the company’s earnings power and balance sheet resilience, supporting a higher valuation range.

Bullish Takeaways

Recent target hikes signal growing conviction that revenue growth will remain robust, underpinned by long term defense and infrastructure contracts.
Higher targets suggest room for further multiple expansion, as execution on restructuring and cost efficiency programs reduces perceived risk.
Analysts see improved cash generation and balance sheet repair as catalysts for potential capital returns and strategic flexibility, supporting the upgraded price levels.
Incremental upward revisions, even when modest, indicate that consensus earnings estimates may still be conservative if contract pipeline conversion remains strong.

Bearish Takeaways

Despite higher targets, some cautious analysts question the sustainability of margin improvement, particularly if inflationary pressures or contract renegotiations intensify.
There is concern that recent valuation gains may already discount a large portion of the turnaround story, limiting upside if execution slips.
Visibility on longer term program profitability remains a watch point, with any delays or cost overruns likely to pressure both earnings and sentiment.
Investors are reminded that the upgraded targets still assume consistent delivery against complex, multi year projects, leaving limited room for operational missteps.

What's in the News

Babcock signalled renewed M&A ambition, highlighting a pipeline of bolt on targets it is actively tracking following its half year results commentary by CFO David Mellors (company results).
The group issued 2026 guidance, targeting mid single digit average revenue growth, an underlying margin of at least 9 percent, and operating cash conversion of at least 80 percent, reinforcing its medium term outlook (company guidance).
Quest Global expanded its long term engineering services collaboration with Babcock in the UK Naval Nuclear Sector, increasing investment in specialised skills such as naval architecture and decommissioning to support critical national infrastructure programmes (client announcement).
Babcock partnered with Zeelo to launch the MoveSmart sustainable commuter shuttle network at its Devonport site, aiming to ease congestion, improve employee access, and support environmental goals for a workforce that includes 11 percent of Plymouth’s population (strategic alliance).
New memoranda of understanding with Skyral, HII and Critical Infrastructure Technologies position Babcock at the centre of next generation defence capabilities, from British Army supply chain modelling tools to submarine launched UUV operations and rapidly deployable 5G and counter UAS platforms for Ukraine (strategic alliances).

Valuation Changes

Fair Value, previously £12.74, has risen slightly to £13.08. This reflects a modest uplift in the company’s intrinsic valuation estimate.
The Discount Rate has increased marginally from 8.08 percent to about 8.37 percent, implying a slightly higher required return and risk assessment in the valuation model.
Revenue Growth assumptions have moved up slightly from around 4.60 percent to approximately 4.78 percent, pointing to a small improvement in medium term top line expectations.
The Net Profit Margin has edged down from roughly 6.02 percent to about 5.88 percent, indicating a modest reduction in projected profitability despite higher revenue growth.
The Future P/E multiple has risen slightly from 24.36x to about 24.69x, suggesting a modestly higher valuation benchmark being applied to forward earnings.

Strong operational performance and successful contract deliveries are expected to positively impact revenue growth and improve margins across sectors.
Strategic international partnerships and improved cash flow allow for investment in new market opportunities, enhancing earnings stability and growth potential.
Unpredictable order patterns, cash flow uncertainties, and inflation risks challenge revenue stability, with potential liquidity impacts from large contracts like Type 31 affecting profitability.

Catalysts

About Babcock International Group

Engages in the design, development, manufacture, and integration of specialist systems for aerospace, defense, and security in the United Kingdom, rest of Europe, Africa, North America, Australasia, and internationally.What are the underlying business or industry changes driving this perspective?

Strong operational performance and delivery can drive future growth as Babcock has a lot of frame contracts where discretionary work is awarded based on performance, which could positively impact revenue.
The company is moving towards its medium-term margin goals, with margins in Nuclear already hitting goals ahead of schedule and Land sector margins significantly improving, suggesting potential for enhanced net margins.
Successful delivery and mobilization of large contracts like Skynet are expected to increase order volumes and margins in the future, contributing to improved earnings and operational efficiency.
International partnerships and strategic expansions, including those related to AUKUS and collaborations with Saab and ST Engineering, may open up new markets and opportunities, potentially driving revenue and strategic growth.
Cash flow has significantly improved, surpassing expectations partially due to favorable timing, and the improvement in pension schemes has reduced obligations. This financial strength allows for more investment in growth and improvements in earnings stability.

Babcock International Group Earnings and Revenue Growth

Babcock International Group Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

Analysts are assuming Babcock International Group's revenue will grow by 4.5% annually over the next 3 years.
Analysts assume that profit margins will increase from 5.1% today to 6.0% in 3 years time.
Analysts expect earnings to reach £331.3 million (and earnings per share of £0.68) by about September 2028, up from £247.1 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as £368.1 million.
In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.0x on those 2028 earnings, up from 21.6x today. This future PE is lower than the current PE for the GB Aerospace & Defense industry at 24.6x.
Analysts expect the number of shares outstanding to grow by 0.4% per year for the next 3 years.
To value all of this in today's terms, we will use a discount rate of 8.2%, as per the Simply Wall St company report.

Babcock International Group Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?

The company's order book remains broadly flat, with lumpy order intake and the potential for larger, fewer orders, which could lead to unpredictability in revenue streams and cash flow. This may impact future revenues.
Marine sector profits decreased due to the absence of significant license fees and were further impacted by increased overhead and support expenses, impacting net margins and earnings.
The company's cash flow benefitted from favorable timing in cash conversion and working capital that might not continue in the future, which could lead to a potential reversal impacting free cash flow and net earnings.
The company faces the risk of working capital reversals, especially on big programs like the Type 31 contract. This could impact the balance sheet's strength and create liquidity challenges affecting profitability.
The potential impact of inflation on costs, despite some recovery in contracts, continues to pose a risk to operating margins and overall financial performance if inflationary pressures increase unexpectedly.

Valuation

How have all the factors above been brought together to estimate a fair value?

The analysts have a consensus price target of £11.867 for Babcock International Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £13.7, and the most bearish reporting a price target of just £7.5.
In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £5.5 billion, earnings will come to £331.3 million, and it would be trading on a PE ratio of 23.0x, assuming you use a discount rate of 8.2%.
Given the current share price of £10.66, the analyst price target of £11.87 is 10.2% higher.
We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.

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Disclaimer

AnalystConsensusTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystConsensusTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystConsensusTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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