Investec upbeat about Babcock despite government contract disappointment

10th Jun 2014 09:57

Investec has maintained its 'buy' rating and 1,377p target price for engineering contractor Babcock International despite the company announcing it was no longer in the running for government contracts to maintain and develop defence property.The company said late on Monday that it will not be awarded any of the work following talks with the Defence Infrastructure Organisation (DIO), losing out on about £4.35bn, according to reports."We understand that Babcock decided to inform the market now that it had not won any of these contracts and remove any market uncertainty," said Investec Analyst John Lawson.Meanwhile, Lawson highlighted that Babcock is the incumbent on two contracts, currently called Regional Prime East and South West, which generated annual revenues of around £150m for the group on "sensible" margins."However, we suspect that Babcock has now been outbid on price as the new contracts are less about the group's mission critical work (where the group will want a decent margin) and more about about 'commoditised' construction-related work (where margins tend to be much lower). "Whilst the loss of these contracts is likely to lead to some loss of income, the overall impact in a group context should be marginal."The stock was 0.4% lower at 1,221.18p by 10:06.BC