Babcock’s half-year scorecard: growth, fatter margins, bigger dividend
Babcock International has posted a strong first half for the six months to 30 September 2025. Revenue rose to £2,538.6m, statutory operating profit jumped 27% to £234.3m, and basic EPS climbed 31% to 33.7p. The interim dividend is up 25% to 2.5p.
Behind the statutory numbers, the “underlying” measures (management’s preferred view that strips out one-off items like derivative revaluations) were also solid: underlying operating profit up 19% to £201.1m, underlying margin up 90 bps to 7.9%, and underlying EPS up 21% to 28.5p. Cash generation stayed tight with 83% operating cash conversion and underlying free cash flow of £140.6m.
| Key numbers (HY26) | HY26 | HY25 |
|---|---|---|
| Revenue | £2,538.6m | £2,408.9m |
| Statutory operating profit | £234.3m | £183.8m |
| Basic EPS (statutory) | 33.7p | 25.7p |
| Underlying operating profit | £201.1m | £168.8m |
| Underlying operating margin | 7.9% | 7.0% |
| Underlying EPS | 28.5p | 23.5p |
| Underlying free cash flow | £140.6m | £94.7m |
| Contract backlog | £9.9bn | £9.5bn |
| Net debt (ex leases) | £55.8m | £145.8m |
| Net debt/EBITDA (covenant basis) | 0.2x | 0.6x |
| Interim dividend | 2.5p | 2.0p |
What’s driving the beat: revenue mix and margin discipline
Organic revenue growth was 7%, led by the Nuclear division, with additional momentum in Aviation and Marine. Land was softer due to lower activity in Rail and Africa civil businesses. Importantly, margins improved in all four sectors, showing that the uplift isn’t just volume-driven – pricing, mix and execution are pulling their weight.
- Marine: revenue £822.5m (+6% at constant FX), underlying operating profit £55.3m, margin 6.7% (up from 5.1%). Growth came from Liquid Gas Equipment (LGE) and Skynet communications.
- Nuclear: revenue £989.1m (+14% at constant FX), underlying operating profit £89.7m, margin 9.1% (8.7%). Civil nuclear grew 25% with Hinkley Point C ramp-up, while defence work stayed robust under FMSP.
- Land: revenue £525.6m (-10% at constant FX), underlying operating profit £41.6m, margin 7.9% (7.7%). Rail and Africa weighed, but the division still nudged margins higher.
- Aviation: revenue £201.4m (+26% at constant FX), underlying operating profit £14.5m, margin 7.2% (4.8%). New work in France (Mentor 2), Canada HEMS and price renegotiations helped.
Translation: Babcock is not only growing, it is getting paid better for what it does. That matters for hitting the company’s near-term 8% underlying margin target and medium-term ambition of at least 9%.
Order book, projects and strategic wins you shouldn’t miss
The contract backlog sits at £9.9bn. That is slightly below the £10.4bn reported at year-end due to the lumpy nature of orders booked in the second half of last year (not a red flag in itself). A few standouts from the half:
- Type 31 programme: first frigate completed float-off; ship three entered assembly. Execution momentum matters here given earlier industry-wide cost pressures.
- Devonport: 15 Dock re-opened, restoring twin-stream submarine maintenance. That should support throughput and future availability.
- DSG: mobilisation of the £1.0bn five-year British Army vehicle support follow-on contract.
- Mentor 2: 17-year military air training contract in France ramping as planned.
- Nuclear de-fuelling: £114m three-year contract to prepare for the first defuel of a decommissioned Trafalgar Class submarine in over 20 years.
- Partnerships: teaming with Patria for the 6×6 armoured personnel carrier in the UK; agreement with Hanwha Ocean to be in-service support partner on Canada’s patrol submarine project; MOU with HII on autonomous UUV launch/recovery.
- International footprint: first defence contract in South Africa for submarine support; 10-year French H145 support contract alongside Airbus Helicopters; over £50m of new Skynet orders.
These aren’t just headlines – they broaden the opportunity set across UK, Europe, and the Five Eyes markets, supporting both growth and margin mix over time.
Cash, balance sheet and shareholder returns
Babcock continues to convert profit into cash. Underlying operating cash flow rose to £166.1m, with operating cash conversion at 83% and underlying free cash flow up 48% to £140.6m. Net debt excluding leases fell to £55.8m and gearing on the covenant basis dropped to 0.2x. Liquidity remains hefty at around £1.4bn, supported by a £600m RCF maturing in 2030 and bonds maturing in 2026 and 2027.
The buyback is in train – £49m completed by 30 September out of the £200m programme. The interim dividend moves to 2.5p (payable 16 January 2026 to those on the register on 5 December 2025). With the pension position swinging to a £31.5m IAS 19 surplus from a prior deficit, the balance sheet is cleaner too.
Decoding the “underlying” talk
“Underlying” is an Alternative Performance Measure used to smooth out items management considers non-core or one-off (for example, derivative fair value movements and acquisition-related items). It helps you see the trend in the business. For the half, the statutory profit also benefited from a positive derivative revaluation and the recovery of a loan related to a prior disposal – both excluded from the underlying view.
Outlook and what I’m watching next
Guidance is unchanged. Management expects to hit an 8% underlying operating margin in FY26, with medium-term goals of mid-single-digit average revenue growth, at least 9% margin and at least 80% cash conversion. In other words: keep nudging margins up while staying disciplined on cash.
Key watchpoints for the next 12 months
- FMSP follow-on: Commercial discussions for the post-FMSP submarine support arrangement are progressing ahead of the current contract end on 31 March 2026. This is central to visibility in Nuclear.
- Type 31 delivery cadence: The programme has moved forward this half; continuing to execute to schedule is the quickest way to de-risk the remaining cost base.
- Divisional mix: Aviation’s step-up in profitability is encouraging. Sustaining that through ramp-ups in France and Canada will support group margins.
- Capex choices: The company is assessing further investment in advanced manufacturing and shipbuilding capacity at Rosyth. Expect more detail as opportunities mature.
- FX sensitivities: The group notes that a 10% move in the South African Rand would swing annual revenue by ~£34m and underlying operating profit by ~£3m; AUD, EUR and CAD also matter, albeit to a lesser extent.
My take: a confident, cash-backed upgrade in quality
This was a high-quality set of numbers. Revenue grew organically, margins rose across all four divisions, cash conversion stayed above the 80% target and leverage fell to very conservative levels. The dividend increase and active buyback reinforce confidence without starving the business of investment.
What could go wrong? Large programmes always carry execution risk, and Land’s civil exposure is still a headwind. But the combination of Nuclear strength, Marine momentum and an improving Aviation business gives Babcock more than one engine of growth. With FY26 expectations unchanged and margin targets in sight, the direction of travel remains positive.
Bottom line: steady delivery, better pricing and disciplined capital allocation are doing what they should. For long-term investors looking for defence and nuclear exposure with improving returns, this half-year shows Babcock moving up the quality curve.
