Babcock International - March 2026
Hosking Partners is a London boutique founded in 2013 by Jeremy Hosking, a portfolio manager at Marathon Asset Management for over 25 years. It runs a single global equity strategy built on the capital-cycle, supply-side approach — contrarian, long-term, and unusually diversified (350+ holdings) under a multi-counsellor model, managing around $5.5bn.
In plain words
This report is about Babcock International, a UK defense engineering firm that maintains nuclear submarines and naval bases. Despite rising defense spending after the Ukraine war, its stock was undervalued at just 8 times profit in late 2024. New management has fixed its finances and started buying back shares (company repurchasing its own stock to boost value). For ordinary investors, this suggests the stock may still have room to grow, especially its civilian nuclear business. Worth a read because such strategic assets are often overlooked by the market.
Hosking Partners' report explores the strategic importance of UK defence engineering services provider Babcock International against the backdrop of geopolitical tensions. The core view is that Babcock, as an operational turnaround candidate, has completed balance sheet restructuring and improved co
Theme and Background
This chapter explores the strategic value and investment logic of UK defense engineering services provider Babcock International against the backdrop of continuously escalating geopolitical tensions. The report points out that the long-term trend of European defense strengthening following the Russia-Ukraine conflict provides a sustained tailwind for the company's growth, and the classification of defense companies has been repositioned from "controversial investments" to "national security essential enterprises."
Core View
The author's core investment thesis is: Babcock is a deeply undervalued operational turnaround target. Although the new management (appointed in 2020) has completed balance sheet restructuring, contract economic improvements, and business refocusing, the stock price at the end of 2024 was still at only 8 times operating profit, significantly below the replacement value of its assets. The report also judges that its civil nuclear engineering division could be the most undervalued potential business growth driver.
Key Arguments and Data
- Strategic barriers: Babcock is responsible for maintaining the UK's continuous at-sea nuclear deterrent, managing three of the four major UK dockyards (HMNB Devonport, HMNB Clyde, Rosyth), of which it directly owns Devonport and Rosyth. It is one of only two operators capable of large-scale nuclear submarine refit, upgrade, and life extension.
- Business de-risking: In early 2024, its largest submarine fleet management contract shifted to a cost-plus model, significantly reducing business risk and transitioning the company toward a more stable, long-cycle operating model.
- Stock return: Since the initial position was taken in March 2023, the stock price has cumulatively risen 447%; since the Q3 2024 AOR report, the stock price has risen another 214%.
| Time Period | Stock Price Increase |
|---|---|
| March 2023 – March 2026 | +447% |
| Q3 2024 – March 2026 | +214% |
- Financial improvement: Record operating profit in the past 12 months, accelerating revenue growth, continuous margin expansion, and balance sheet deleveraging.
- Capital return: At the end of 2024, the author sent a letter to management advocating share buybacks to take advantage of the undervaluation; six months later, the company announced the launch of a £200 million buyback program.
- Civil nuclear potential: Babcock is currently the only surviving UK company capable of providing nuclear power services; this division is one of the group's highest-margin businesses, but the author emphasizes that its actual scale will depend on the economic terms of contracts provided by the government.
Companies/Assets Involved
- Babcock International: Core holding, bullish. The company is described as one of the most strategically significant engineering service companies in the UK. Its civil nuclear engineering division is a potential new profit growth engine. The report points out that management is cooperative, strategically clear, and open to shareholder opinions (e.g., accepting buyback suggestions).
Investment Implications
- Currently, Babcock remains undervalued. Despite the substantial stock price increase, the 8x operating profit level is far from reflecting its strategic asset premium and improved business stability.
- Focus on the company's cash return operations (such as share buybacks) that take advantage of the undervaluation – this is a signal that management's interests are aligned with shareholders.
- Civil nuclear engineering could become the next structural growth opportunity, but close tracking of the UK government's setting of contract economic terms is needed to avoid repeating past mistakes.