Babcock preview

As the divestment plan continues, can Babcock finally generate cash flow given the geopolitical situation, and how does the focus on Australia work with the new government?

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Getting back into the green

At its latest trading update, covering the first ten months of the fiscal year, Babcock's management was not exactly upbeat, but at least positive about the company's outlook for the year. Unlike many other firms jostled by inflation, Babcock simply reiterated that everything was going according to plan.

After two years of negative earnings, analysts are hopeful that the firm will finally return to some modest profitability. Although net sales are expected to increase marginally, margins are expected to deliver the majority of improvement, but nowhere near enough to offset last year's losses. Attention, therefore, is on the future, and whether the company can take advantage of the current geopolitical situation.

Getting back into the game

As European countries ramp up spending, Babcock is notable for not having announced any new major contracts since the start of the war in Ukraine. Part of that is because defence spending is focusing on land. But Australia's main defence needs remain at sea. The new PM in Australia has vowed to continue defence spending from the prior government.

The focus is likely to be on further commentary on cost recovery and potential investment plans. Particularly if the CEO signals a return to cash flow positivity during the year. However, supply chain concerns can be a problem for a firm that is locked into long-term contracts.

Babcock & Wilcox at crossroads

Babcock’s share price fell into a bear market at the end of May after a death-cross formation diminished any hopes of recovering. The company’s stock will remain under pressure while trading in an area below the 50 or 200-day averages at $6.85 and $7.50 (respectively).

The May 11 bounce off $5.20 did not translate into a reversal as the attempt to flip the 200-day average on June 8 failed. Instead, it has since widened the distance between the lagging indicators.

Bulls could make another effort at the major SMA as prices slid down to $5.75, printing only a higher low for now. In the interim, traders can focus on the two gaps observed between $6.75-$6.85 and $7.10-$7.15. Above the 200-day $8.00 is major support if the $10.40-9.00 descending trendline weakens. Inversely, losing $5.20 can lead the shares down to $4.80 and then $3.30.

Source: Spreadex trading platform

Key takeaways

Babcock’s management is confident that things are going according to plan and analysts expect increased profitability but nowhere near enough to offset last year’s losses.

Investors are likely to focus on commentary about cost recovery, investment plans, and cash flow positivity, as well as the firm’s plans to win new long-term contracts amidst the war in Ukraine. At current, there are no major contracts lined up, but Australia's new Prime Minister has pledged to continue on a course of strong defence spending.