Babcock International took a £140m charge on its Type 31 frigate contract and cut annual underlying operating profit by 19% to £293.3m. Shares in Babcock International fell more than 3% on Monday morning. The hit came from a contract won in 2019 that now carries only limited protection against cost increases.
David Lockwood on Babcock International
David Lockwood said the company had delivered continued strategic and operational progress. He also said he is to leave the business at the end of the year. His comments sat alongside a results line that showed how quickly one programme can pull on group profit when cost assumptions move against it.
The company said the contract was loss-making because of macroeconomic changes and increases in estimated costs due to the maturing of the design and the forecast cost of labour. Babcock said late-stage changes were made to the designs of the first two ships in the five-ship fleet, adding to the pressure already created by Brexit, Covid, raw material prices and UK labour shortages.
Royal Navy Type 31 frigates
The charge affects five Type 31 frigates for the Royal Navy, a programme Babcock said had only certain escalation clauses to protect against higher costs. The company’s own wording leaves little room for a clean fix: the design changed, labour costs moved higher, and the contract absorbed the difference. For Babcock, that means the problem is now embedded in reported numbers rather than tucked away as a one-off delay.
That is also why the rest of the business matters. Excluding the Type 31 contract loss, Babcock increased operating profits by 19% to £433m, and it said its nuclear and aviation operations had performed strongly. Babcock also said it had £9.8bn in forward contracts, down from £10.4bn a year ago, while a new win expanded its partnership with HII to include a nuclear submarine programme.
Hargreaves Lansdown on shares
Aarin Chiekrie said Babcock played down the long-term impact of the frigate contract. The analyst said: “Governments around the globe are becoming more focused on improving their defensive capabilities, and Babcock looks well placed to benefit from this long tailwind and capture some of this ex”. For shareholders, the immediate read-through is narrower: the contract loss hit profit hard, but the company is still steering the rest of the portfolio toward defence and nuclear work where demand remains structural.
The unresolved issue is how much more the Type 31 contract could absorb if costs, timing or labour rates move again. Babcock has already signalled the mechanism that hurt it: limited escalation cover, a maturing design and higher labour forecasts. If those inputs keep shifting, the profit line could stay under pressure even if the wider business keeps expanding.
