UK engineering firm Babcock lifts forecast as defence needs rise

By Sarah Young

LONDON (Reuters) -British engineering company Babcock upgraded its medium-term operating margin guidance on Wednesday, and said it expects to benefit from more UK government spending on defence and energy security to counter rising geopolitical instability.

Shares in Babcock jumped 13% to 1,149 pence in early trade, the highest level in more than 10 years, after the positive update. The stock has more than doubled since the beginning of the year, outperforming the FTSE index which is up 8%.

Britain has this year committed to spend more on defence, as well as throwing its weight behind nuclear power.

"This is a new era for defence," CEO David Lockwood said in a statement.

British Prime Minister Keir Starmer on Tuesday pledged to boost overall defence and security spending to 5% of economic output by 2035, weeks after the government's strategic defence review noted rising threat levels and new nuclear risks.

Babcock, which maintains Britain's naval fleet, builds new warships and provides weapons systems and nuclear engineering services, said it was now expecting an underlying operating margin of at least 9% in the medium term, up from at least 8% previously.

"I would say it's a sensible piece of guidance for the medium term but there's clearly upside potential beyond that," Lockwood said in an interview.

The company makes 62% of its revenue from its UK defence business, but Lockwood said he could see growth opportunities in countries like New Zealand, Indonesia and Canada, and in Europe.

Babcock's France-based business, which provides military air training to the French Air Force and engineering support for helicopters, is its fastest growing unit, he said.

For the current financial year, Babcock said it expected an underlying operating margin of 8%, up from the 7.5% it recorded for the 12 months to end-March 2025. It also announced a 200 million pound ($272.46 million) share buyback and lifted its dividend by 30%.

($1 = 0.7341 pounds)

(Reporting by Sarah Young; Editing by Kate Holton and Rachna Uppal)