November 21, 2017 / 8:01 AM / in a year

UPDATE 2-Babcock results overshadowed by UK defence spending worries

* Says UK defence spending reviews could slow revenue growth

* First-half earnings in line with expectations

* Shares down 4 pct (Adds detail, shares, analysts)

By Elisabeth O’Leary

EDINBURGH, Nov 21 (Reuters) - Babcock warned that British defence spending reviews could slow revenue growth at its land division next year, sending shares in the engineering outsourcing company 5 percent lower despite first-half earnings in line with expectations.

The British group, which provides design, production, maintenance and training services for the defence and engineering industry, derives three quarters of its revenue from the UK and its shares have come under sustained pressure from expectations that Brexit will delay customer decision-making.

The stock is down 20 percent in the past 6 months, roughly in line with other British outsourcers, which broker Peel Hunt said reflects investor concern over pressures on the funding of UK defence programmes, the issues at other companies in the outsourcing sub-sector and increased political uncertainty.

Babcock cautioned that UK government spending reviews could “delay the start of large new vehicle programmes” and weigh on organic revenue growth in its land division, which provides support for military vehicles, in the year to March 2019.

Overall, however, the company said it is on track to meet its profit expectations this year thanks to strong performance in engineering maintenance and its ability to win new work.

Its shares were down more than 4 percent at 723 pence by 1129 GMT, versus a flat FTSE 100 share index, and Chief Executive Archie Bethel said this year’s stock performance had been disappointing given the group’s results.

Underlying pretax profit rose 4.9 percent to 239.5 million pounds ($317 million) in the six months to Sept. 30 on revenue up 5.9 percent at 2.64 billion pounds, which analysts said was in line with expectations.

The company’s biggest customer is Britain’s Ministry of Defence and Babcock highlighted opportunities in its Marine division, where it expects the UK’s shipbuilding strategy to underpin revenue.

Babcock said 92 percent of budgeted revenue is now in place for the full year to March 31, adding that it expects a slight improvement in overall group margin during the second half.

It also played down the potential impact of Brexit uncertainties, citing its provision of air, land, sea and nuclear services that are critical to security and defence regardless of the economic and political backdrop.

Investors, however, may need more convincing.

“The tone of the questions (by the investment community) is negative and the perception is that this is a company that is going to warn on profits. To my mind, it isn’t,” said Shore Capital analyst Robin Speakman.

Unlike administrative service providers Capita, Serco and Carillion, Babcock’s business model is not based on discretionary spending, he added. ($1 = 0.7555 pounds) (Reporting by Elisabeth O’Leary; Editing by David Goodman)

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