Comment from Mark Wright, Fund Manager, Seneca Investment Managers.
“We have recently added support services company Babcock International to the UK equity allocations across our range of multi-asset portfolios.
“In line with our value investing approach we are always looking for investment opportunities where the fundamental value of a company is unrecognised by the broader market. Babcock has been tarnished with the same brush as other support service companies, such as Capita, Interserve and Mitie, which have all issued profit warnings over the last few years. As a result, its valuation close to halved on simple metrics such as price to earnings ratio, and its dividend yield reached a 10 year high, comfortably covered three times by earnings.
“We believe the company is fundamentally different to others in its sector. It has a very skilled workforce, and these workers are increasingly in short supply. The company operates in complex, highly regulated and often secretive industries, so the barriers to entry are high. Contracts are long term in nature and allow gains and pains to be shared with customers. Unlike many peers, Babcock doesn’t depend on cost-plus contracts that often rely on add-on work at high margins to earn a decent overall return.
“Examples of specialist contracts include the refit work for all UK nuclear submarines and 75% of the UK’s naval ships, maintenance of the London Fire Brigade’s fire engine fleet, and the operation of search and rescue and air ambulance fleets. Babcock also trains pilots, provides engineering support to the military, as well as operational, design and project management support to the nuclear industry; a major growth area, including new builds (Hinkley Point C) and decommissioning (Sellafield).
“The latest trading update, issued shortly after we took our position, prompted the shares to rise by 6%, an indication of the value opportunity this holding represents.”
Past performance should not be seen as an indication of future performance. The value of investments and any income may fluctuate and investors may not get back the full amount invested.
The views expressed are those of the fund manager at the time of writing and are subject to change without notice. They are not necessarily the views of Seneca and do not constitute investment advice. Whilst Seneca has used all reasonable efforts to ensure the accuracy of the information contained in this communication, we cannot guarantee the reliability, completeness or accuracy of the content.
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