Must read weekly preview: Babcock International, Bunzl and Berkeley Group

Babcock International FY – Monday 22 June

In January, Babcock International Group (LSE:BAB) delivered a topical third quarter trading update which underlined the reasons why the defence sector has been at the heart of investor interest over recent times.

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Quite apart from being a major contractor for the UK government, the group has interests across many jurisdictions within its numerous business units. Babcock revealed that its strong momentum from the first half continued into the third quarter, with some significant strategic developments which included, but were not limited to, being selected as the prime industrial partner in Indonesia’s £4 billion Maritime Partnership Programme and agreeing to two further Arrowhead 140 licences.

By unit, Nuclear growth continued with the business extended its partnership in the US Virginia Class submarine build, Aviation and Maritime were also strong, more than offsetting any weakness in the Land division given lower Rail activity. Meanwhile the £200 million share buyback programme is ongoing and, in terms of outlook, the group reiterated its guidance given that the vast majority of forecast revenue for the year was now contracted, and confirmed that it was likely to meet its stretching 8% margin target.

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Expectations for prospects have been on a march, which weighed on the opening reaction to the Q3 update, but for the most part the likes of Babcock have lived up to their billing. The shares have risen by 95% over the last two years, although the price has fallen by 18% so far this year which has been the result of valuation positioning. Even so, it appears that investor appetite for the stock is largely undiminished given the global backdrop.

Bunzl trading statement – Tuesday 23 June

The group’s full-year results in March steadied the ship somewhat. A savage share price reaction to the profit warning last year left a sour taste in the mouth for investors. A subsequent trading statement and then half-year numbers in August stemmed further declines, and a relief rally has seen Bunzl (LSE:BNZL) shares rise by 23% in the year so far.

However, much of the damage had already been done. The price has fallen by 13% over the last two years, with the group’s largest market in North America at the eye of the storm. A combination of sales weakness, product price deflation and costs following the rollout of its own branded offering led to investors heading for the exit. In addition, questions were raised on the bolt-on acquisition policy which has served the group well over a number of years. Indeed, during last year a further eight were made for a consideration of £132 million.

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Revenues grew by just 0.6% for the year to £11.85 billion and by 3% at constant exchange rates, although the majority of that growth was driven by acquisitions. The group remains committed to its acquisitive policy, with the pipeline remaining active for the coming year, although revenue growth is forecast to be moderate and operating margin to decline slightly, having already fallen to 7.7% from a previous 8.3% this year.

For the most part, Bunzl remains a well-run if not currently well-regarded stock. The dividend has seen 18 consecutive years of increases and the current yield of 2.9% is of some appeal. Although Bunzl may look undemanding on a historic valuation basis, investors are treading carefully until such time as a sustained recovery is in evidence.

Berkeley Group FY – Wednesday 24 June

In its March trading statement, Berkeley Group Holdings (The) (LSE:BKG) maintained its previous guidance of full year pre-tax profit of £450 million and net cash of £300 million - notwithstanding the potentially debilitating effect of the US/Iran conflict on consumer confidence. However, the decision to stop buying new land and an estimate for profits of £1.4 billion over the next four years implies an annual average of £350 million, which resulted in a further sharp share price drop on the day.

The current “Berkeley 2035” strategy represents a marathon, not a sprint. It has a number of strands, with the headlines being projected growth in the Return on Capital Employed, further investment in the group’s recently launched “Build to Rent” platform (“Berkeley Living”) and an ongoing focus on shareholder returns which for the moment are focused towards share buybacks in the absence of dividend payments. Some £7 billion of free cash flow has been identified to underpin the strategy over the next ten years, including £5 billion of new investment, where the group plans to maintain its historic operating margin range of between 17.5% and 19.5%.

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In the meantime, the group’s focus on London and the South East has more recently been both a blessing and a curse. On the one hand, higher house prices following on from a systemic undersupply of homes, employment levels remaining strong and the recent round of wage rises (while inflationary) helped mitigate some of the effects of the economic backdrop. However, more recently a red flag emerged from its September trading statement, where Berkeley revealed that new housing starts in London were currently at levels not seen since the Great Financial Crisis of 2008, even though it remained optimistic on the government’s more positive ambitions on planning permission and housing delivery, albeit at a slower pace than expected.

The overarching concerns have fed through to a share price which has declined by 16% over the last year, leading to its relegation from the FTSE100 this month, and a fall of 30% over the last two years. Of course, this is a highly cyclical sector and if nothing else, the perennial undersupply of homes in the UK will provide future opportunities although for now, investors are unconvinced.