Defence contractor Babcock International has reported a dramatic 45% fall in pre-tax profits to £120 million, attributing the decline to the combined impact of Brexit and the Covid-19 pandemic on a critical Royal Navy contract.
Contract delays and cost overruns
The company, which provides support services to the UK Ministry of Defence, said the Type 31 frigate programme had been beset by supply chain disruptions and labour shortages directly linked to Brexit and the pandemic. The contract, valued at £1.25 billion, is now expected to be delivered later than originally planned, with additional costs running into tens of millions of pounds.
Chief Executive David Lockwood said: "The challenges we have faced on the Type 31 programme are unprecedented. Brexit has created significant friction in our supply chains, while Covid has exacerbated labour shortages and caused delays in the delivery of key components."
Financial performance
Babcock's revenues fell 8% to £4.1 billion in the year to March 31, as the company also took a £50 million hit from the cancellation of a contract to support the Royal Navy's aircraft carriers. Underlying operating profits dropped 22% to £280 million, reflecting the broader impact of the pandemic on the group's civil aviation and oil and gas operations.
The company's shares fell 12% in early trading on Tuesday, as investors reacted to the profit warning and the delay in the Type 31 programme. Babcock said it was in discussions with the Ministry of Defence over the revised timeline and cost of the contract.
Outlook and government response
Lockwood added that the company was "working hard" to mitigate the impact of Brexit and Covid on its operations, but warned that the challenges were likely to persist for some time. "We are seeing some signs of improvement in the supply chain, but the situation remains volatile," he said.
The Ministry of Defence said it was "aware of the issues" and was working closely with Babcock to ensure the Type 31 programme remained on track. A spokesperson said: "We are committed to delivering the Type 31 frigates as quickly as possible, and we are in regular contact with Babcock to monitor progress."
Babcock's profit warning is the latest in a series of setbacks for the UK's defence industry, which has been hit by a combination of Brexit-related trade barriers, pandemic-induced supply chain disruptions, and rising inflation. The company said it expected trading conditions to remain challenging in the coming year, but reaffirmed its medium-term targets for revenue growth and margin improvement.
