Babcock

[TUK020]

Questor in the Telegraph gives Babcock a good rating, given PE, Yield and forward order book.
Any views?

[monabri]

I don't hold but they look "ok" from the SimplyWallStreet assessment.

-undervalued based on cash flow assessment
-judged as being good value relative to GB commercial services industry
-lowish growth in earnings (but growth).
-forecasts out to 2021/2 look ok
-Return on capital is "moderate" (8%) ..could be better
-earnings easily cover the debt - the debt has been reasonably "level" since 2014.
-expect divis to tick up over the next few years
-divi cover looks good

[Alaric]

Questor in the Telegraph gives Babcock a good rating, given PE, Yield and forward order book.

If it has a high yield, that's because the share price has been falling. It looks to be another company in the services sector where the stated profits and hence dividend cover can be dependent on the accounting treatment.

By way of example suppose a Company signs a ten year contract that projects to give revenues of 100 per year and expenses of 90 per year. They could possibly justify reporting current period profits of anywhere between zero and 100, but if they pay a dividend on the strength of it, they have to borrow to pay the dividend or use capital earned or raised from elsewhere. Both the revenue and expenses may be uncertain, so reporting and distributing profits as dividends before they are in the bank could be a misleading activity.

[pyad]

...By way of example suppose a Company signs a ten year contract that projects to give revenues of 100 per year and expenses of 90 per year. They could possibly justify reporting current period profits of anywhere between zero and 100, but if they pay a dividend on the strength of it, they have to borrow to pay the dividend or use capital earned or raised from elsewhere. Both the revenue and expenses may be uncertain, so reporting and distributing profits as dividends before they are in the bank could be a misleading activity.

The above comments are wrong. I'm not going to bore everyone with the details but there have long been accounting standards on contract accounting so in your example they could not simply book a profit of "anywhere between zero and 100".

In fact the latest accounting standard on this matter is quite recent, IFRS15, which became effective from January this year. If you read company accounts you may well see reference to this in affected businesses and in some cases restatement of prior year figures to make them comparable on the new standard.

To a large extent accountancy is an art, not a science, so that unavoidably many matters will rest on an opinion rather than a fact. It's not perfect so that cock ups, over optimism and outright falsehoods will occur but nevertheless and contrary to the sort of opinion expressed above, those who prepare accounts and audit them can't just do what they like.

[Alaric]

those who prepare accounts and audit them can't just do what they like.

Perhaps then you could explain the not infrequent occurrences where Companies have been given a clean bill of health in their Accounts and accompanying audit but collapse within the next accounting period without it would seem having hit a major unforeseen disaster. Carillion were running out of money but continued to pay dividends. Why didn't accounting and audit standards stop them?

[pyad]

I have already explained it above in that accountancy is not perfect etc. so that failures, deliberate or otherwise, will occur occasionally, even with standards. Contract accounting is a difficult matter. But your comment, by stating wrongly that a company can report any profit they like on a contract, indicates that you were not even aware that there are standards and it is this view that I wished to correct.

[Alaric]

But your comment, by stating wrongly that a company can report any profit they like on a contract, indicates that you were not even aware that there are standards and it is this view that I wished to correct.

I'm aware there are standards, but what sort of latitude do they allow? In the example I quoted, what would be the range of acceptable outcomes? If you are selecting shares to "buy and forget" on the basis of dividing numbers from the accounts by other numbers in the accounts, why doesn't flexibility "art" in the accounts make this a hazardous process for comparing the relative strengths of companies?

The very fact that accounting standards are being revised to inhibit the immediate reporting of long term contracts as contributing to profits suggests past deficiencies in treatment and that the basis for past selection of stocks may have been flawed.

[Raptor]

Moderator Message:
Very interesting but not for this thread or board as a "general" discussion on "accounting standards". Thanks, Raptor.

[Urbandreamer]

Without wishing to get into accounting standards, there is a bit of a difference between the likes of Babcock and Carillion.

Babcock has little competition in what it offers, however it is VERY dependent upon a single customer (HMG).

For example:
If the government decided to sell all it's nuclear subs it would have a HUGE impact on Babcock. However it is somewhat unlikely that HMG will chose to get them maintained elsewhere.

They do other things, but the same sort of story applies to all that they do.

I hold, but recognise that it's not beyond belief that HMG may require less of Babcocks services in the future. I'm trying to decide if I want to top up or not.

[SlickMongoose]

I think the combination of defence cuts from the Tories, and threats to end defence contracting from Corbyn, are combining to keep the share price low.

[Urbandreamer]

.... and threats to end defence contracting from Corbyn, are combining to keep the share price low.

I'm keen to hear more. I also hold SSE, and recognise that Mr Corbyn would like to return to a time when many things were state owned. However I don't recall a time (except in times of war) when what Babcock provides was state owned (even then it wasn't, it was simply used under the right of angary*).

Let us be honest, is Corbyn going to nationalise everything?

Obviously defence related things SHOULD be high on priorities, but evidence suggests not.

Or have I misunderstood?

*Angary: https://www.britannica.com/topic/angary

[SlickMongoose]

.... and threats to end defence contracting from Corbyn, are combining to keep the share price low.

I'm keen to hear more. I also hold SSE, and recognise that Mr Corbyn would like to return to a time when many things were state owned. However I don't recall a time (except in times of war) when what Babcock provides was state owned (even then it wasn't, it was simply used under the right of angary*).

Let us be honest, is Corbyn going to nationalise everything?

Obviously defence related things SHOULD be high on priorities, but evidence suggests not.

Or have I misunderstood?

*Angary: https://www.britannica.com/topic/angary

This is what I was referring to:

https://www.bbc.co.uk/news/uk-politics-44594438

[Urbandreamer]

This is what I was referring to:

https://www.bbc.co.uk/news/uk-politics-44594438

Many thanks. However I do think that there is still a bit of a difference between what Capita does and Babcock.

To put it plainly Babcock provides large things like docks and experience in obscure things like military reactors (I know enough about the subject to know just how much I don't know).
Capita provides people, Ok possibly trained people. Do they compete for the maintenance of the sub's contract? Who does, or can? Who can provide a dry dock in this country and would they let a nuclear reactor be serviced in it?

Seriously, does the BBC article suggest that maintenence of those nuclear subs will go elsewhere?
Now we come to other equipment. Seriously, is it a good idea to be relient upon other countries to maintain your military equipment, even if you buy it from them. What if it strangly stops working just when you need it?

[SlickMongoose]

This is what I was referring to:

https://www.bbc.co.uk/news/uk-politics-44594438

Many thanks. However I do think that there is still a bit of a difference between what Capita does and Babcock.

To put it plainly Babcock provides large things like docks and experience in obscure things like military reactors (I know enough about the subject to know just how much I don't know).
Capita provides people, Ok possibly trained people. Do they compete for the maintenance of the sub's contract? Who does, or can? Who can provide a dry dock in this country and would they let a nuclear reactor be serviced in it?

Seriously, does the BBC article suggest that maintenence of those nuclear subs will go elsewhere?
Now we come to other equipment. Seriously, is it a good idea to be relient upon other countries to maintain your military equipment, even if you buy it from them. What if it strangly stops working just when you need it?

The section of the article i'd worry about is:

"And we will call an immediate halt to the significant contracts that are currently being considered for outsourcing, with Labour introducing a clear presumption in favour of public contracts being delivered by the public sector."

If every time a contract comes up for renewal Labour move it in-house, then Babcock will run out of contracts. Now maybe Labour won't go that far, but maybe they will. Who knows? As for the nuclear subs, what's stopping Labour from not renewing the contract and then hiring the staff who perform it? You might not think it's a sensible idea, but that won't stop them.

I'm not saying it's definitely going to be like that, but it might, and I think it's helping to depress the share price.

[SlickMongoose]

More defence cuts today:

https://ukdefencejournal.org.uk/at-leas ... -new-cuts/