Centrica rose 6% over the week, Babcock International 6.2%. Let’s have a look at what’s driving these high equity returns.
Centrica plans to bump investment in green activities by 50% from 2023-28, including energy security of supply and flexbility, renewable and low carbon generation, as well as customer offerings that support the transition to net zero, said the CEO in the annual report statement.
They highlighted the net cash position vs free cash flow as supportive of growth positions in LNG storage and carbon capture technologies. The adjusted net cash position is £2858m up slightly yoy from £2744m in 2023. This reflects the contribution of expanding its operating base. The company describes itself as a “conduit” for energy security policy, with a key example being the February 2024 LNG supply deal with Repsol, also with the two natural gas purchase and sale agreements with Coterra Energy announced October 2024.
As regards regulatory financial reporting standards under GAAPs, the company was forced to acknowledge a decline in free cash flow of £989m compared to £2207m in 2023, with also a decline in adjusted operating profit – £1.6bn vs £2.8bn in 2023. However its sustainability record indicates a long-term growth prospect. Centrica has already attained 30% green investment based on the EU’s Sustainable Taxonomy and publishes any deviations from official reporting guidance whilst remaining engaged with stakeholders’ policy feedback. It cites the installation of 1million smart meters in 2024 as part of a new Meter Asset Provider sideline, “providing the group with a steady source of income in years to come while still helping customers decarbonise.”
Additionally the company highlighted acquisitions in “proven renewable technology generation”, namely wind and solar generators and acknowledged its loss-making Rough natural gas carbon-recapture project would need a costing review due to the exorbitant overheads in 2025 estimated at between £50m and £100m. They have already sunk £2bn into preparing the site for development but concede that “While the site plays an important part in the UK’s energy and price security, and can be a crucial part of the future hydrogen economy, making material losses is not sustainable on an open-ended basis,” and they promise investors to review their financial exposure with this in mind.
Other more profitable expansions of its energy service offerings include a £70m investment in Highview Power’s Liquid Air Energy Storage in June, an the 20MW hydrogen peaker in Redditch.
Its services offering has demonstrated an increasing level of customer satisfaction, the Chair highlighted in his statement that “Over the course of 2024, we’ve seen further progress in improving customer service in British Gas Services and Solutions. We’re also delivering an improved NPS, a key metric of customer satisfaction, in British Gas Energy.” NPS signifies a customer’s willingness to refer an engineer on the basis of home visit, assessed through individual questionnaires.
He explained that in 2023 the installment of prepaid meters under warrant was paused on the grounds of affordability for customers, citing a “material risk of financial hardship,” although Centrica ried to mitigate the affordability barrier by investing in “a number of changes to our systems, processes, training oversight arrangements, and we remain committed to supporting our customers, particularly the most vulnerable.”
In the context of debt relief, they spearheaded the “You Pay: We Pay” flagship scheme which 100% matches payments that eligible British Gas customers are finding difficult to pay into their account to decrease the outstanding balance. He points to the suggestion of a social tariff underpinned by data sharing as an alternative way of monetising delinquency or default in debt accounts.
However, he also claims the company has voluntarily given £140m to support affordable energy initiatives since the beginning of the energy crisis, to beneficiaries including £20m in January 2024 to the British Gas Energy Trust.
The financial year 2024/5 saw three phases of a share buyback program, starting with a £200m tranche in July 2024, then a £300m tranche in December 2024, culminating in a £500m repurchase of its own equity in February 2025, with the total value of share capital held by the company finalised at 25% of its total equity level.
“Additionally, we returned share capital to investors in the form of dividends, which came to 4.5p at the end of 2024, inclusive of a 1.5p interim dividend outlined in July”.
Babcock’s Annual Report for FY 2025 represents its first FTSE100 index listing after over 7 years absence. The company was pleased to announce revenue of £4,831m, of which underlying operating profit represented £363m, up from £238m in 2024, with underlying operating profit margin of 7.5%. It notes that Statutory Cash from Operations was £357m, down from £374m in 2024, but that the organisation found non-GAAP reporting standards to more accurately represent its financial position.
Around 74% of Babcock’s revenue is from defence contracts, with 5% from civil nuclear. It points to a £10.4bn “contract backlog” of forward orders yet to be delivered. Its underlying free cash flow was £153m, with net debt levels excluding leases standing at £(101)m.
The company’s key business divisions as follows:
- Marine – design, build and through-life support for warships and submarines, and associated weapons handling and launch systems; creation of secure military communications systems; and what is claims are “world-leading commercial liquid gas equipment systems.
- Nuclear – through-life complex engineering support to the entire UK submarine fleet; owner-management of infrastrcture including Devonport dockyard; UK civil nuclear new build, generation support and de-commissioning projects; other international contracts in civil and defence markets.
- Land – asset management and through-life support for complex military equipment as well as ongoing skills training for ground deployment; systems integration and engineering services in power gen, transport networks, and mining equipment.
- Aviation – flying training for UK’s Royal Airforce, French Airforce and French navy; through-life support of military flying assets and other air operation support “for government programmes, saving lives and protecting communities”
The company says the average underlying operating cash conversion is higher than or equal to 80%, and highlights a number of innovations as follow:
i) better alignment between project management, engineering and commercial functions to mobilise pipeline contracts, as part of Global Business Management System to ensure continuity and identify risk factors.
ii) improved governance controls for bidding, strengthening the legal review process on tenders.
iii) FY25 published first Supplier Assurance Handbook to mitigate procurement risk, “enhancing transparency by detailing our sustainability considerations, audit and development process.”
iv) new AI functionality with capex developing Athena – “As we look to FY 2026, the program will focus on large-scale integration across the business, supporting our governance of costs and efficiencies.”
v) In employee management, it has rolled out an Engineering Role Framework with on-the-job training in key competencies, developing a Production Support operative scheme to access a wider talent pool; apprenticeships in space systems and cyber security; and taking a leading role in the UK’s National Nuclear Strategic Plan for Skills.
Wide Moats – the Investment Prospect
- own initial assets, with long lifecycle
- operational asset knowledge and capability transfer
- strategic partnerships with high barriers to entry
Looking ahead, FY25 saw a refocusing of the technology team, “establishing cross sector and country working groups for each of our strategic technology capability teams… These themes drive innovation, ensure our technology relevance and empower us to deliver cutting-edge, practical solutions.”
Babcock CEO trumpeted an upgrade in the company’s medium-term guidance, and a 30% increase in full-year ordinary dividend as well as revealing a £200m share buyback program which will be rounded off in FY26.
Brightsides.uk 
Leave a comment