Babcock International Group PLC (LON:BAB) caught the market on the hop this morning with its dramatic plans to avoid an equity issue at all costs.

The company, the Ministry of Defence’s second-largest contractor, announced job cuts, £2.7bn of non-cash writedowns and lowered profits guidance but still the share price rocketed (if you will forgive the phrase), with the company’s market value now a third higher than it was last night.

If the above was the bad news – although the stock market’s interpretation of job cuts is somewhat different to the views of the staff being laid off – then the good news was that the company is committed to avoiding a rights issue that would almost certainly have been at a heavy discount to the prevailing share price.

Instead of tapping the market, the company has opted to sell off the family silver.

Broker Liberum’s research note essentially nutshelled the situation: “£1.7bn of impairments and downgrades but no rights issue”.

“The contract profitability and balance sheet review (CPBS) has identified impairments and charges totalling approximately £1.7bn. This is larger than many had expected but management is right to clean up the balance sheet once and for all. This is not split between the different divisions, but we expect the majority relates to Aviation, and we expect a large goodwill write-off in Land. The vast majority is one-off and – the only cash impact is the £30m ongoing profit impact, but there are also some working capital write down. We do not expect a significant ongoing cash impact that we had from Serco’s Onerous Contract Provisions,” the broker said.

“It will take time for the market to digest this statement; however, the lack of a right issue is a clear positive,” Liberum said, reiterating its price target of 350p.

Babcock currently trades at 330p, up 40% as short-sellers race to cover their positions. 

According to the web site, around 2.4% of the company’s shares are out on loan to “short sellers” – speculators who borrow shares from investment institutions and sell the shares in the expectation that they will be able to buy them back cheaper later on.

The company has been in the sights of short-sellers for some time now.

READ Babcock forced to refute further claims from shadowy short-seller Boatman Capital

About two years ago, Boatman Capital Research set about Babcock, accusing the company of overestimating the Defence Support Group subsidiary’s biggest contract by as much as £75mln.

It has also called on bosses to simplify the company’s “unnecessarily complex” structure and ditch the “accounting tricks and obfuscations” which, it says, contributes to a “distrust” of its finances.

Babcock’s management of the time refuted the allegations, following the Mandy Rice-Davies principle but now Babcock, under new management, appears to have admitted that most of Boatman Capital Research’s accusations were on the money.


— adds broker comment and updates share price reaction —