Babcock International (BAB)
After a painful reset in 2021, this defence specialist is now operating from a position of strength, writes Michael Fahy.
After taking the helm at Babcock in late 2020 David Lockwood pledged to raise £400mn through disposals within 12 months.
By the time it reported 2022 numbers, Babcock had exceeded this target, allowing it to pay down debt, make inroads into its pension deficit and spend money on improvements at its Devonport shipyard. Yet when full-year results for 2023 rolled around in July, it reported a further £100mn hit taken on a long-running contract for the Ministry of Defence.
The company is also losing money on other contracts, and management said that 11 per cent of last year’s revenue was linked to work on which it earned a “low- to zero-margin”.
The elimination of these legacy contracts will take time — they only start to meaningfully fall away in 2026 and stretch until 2028. As they do, though, and as the company both delivers projects more efficiently and only bids for work that meets risk and margin thresholds, Babcock is confident of sustainably maintaining an operating margin above 8 per cent.
Babcock’s improved performance, and its decision to reintroduce a dividend for the first time in four years, are behind a 35 per cent uplift in its share price over the past year. Investor sentiment has clearly picked up.
However, with its shares priced at under 10 times forecast earnings, Babcock’s valuation multiple is a third cheaper than domestic peers Chemring and BAE Systems.
As debt is paid down, this gives management more options to boost returns, either through growth capex, bolt-on M&A or simply returning spare cash to shareholders. The result is a company with reasonably priced growth prospects, and a balance sheet that no longer bears the battle scars of 2020 and 2021.
Nvidia (US:NVDA)
Given this AI semiconductor company’s growth prospects, its valuation isn’t as rich as it appears, writes Arthur Sants.
After a year in which the share price of the main beneficiary of the artificial intelligence (AI) race more than tripled, plenty of investors will fear they have missed the boat with semiconductor designer Nvidia.
But when it comes to equities, what goes up doesn’t always come down. Especially when the company in question is enabling a technology that could disrupt the world in the way steam power, electricity and the internet did before it.
On 64 times trailing profits, the stock’s valuation appears extreme. But factor in Nvidia’s current momentum, and things look much more reasonable. In the three months to October, revenue rose 206 per cent year on year to $18.1bn. As a capital-light semiconductor designer that outsources manufacturing, Nvidia’s operating margin climbed to a massive 57 per cent, enabling operating profit to rise 1,259 per cent to $10.4bn year on year.
Such rapid growth has some fund managers making a value-based argument for the shares. “Nvidia’s share price growth has been driven by its earnings growth rather than valuation expansion,” argues Tony Wang, T Rowe Price’s co-portfolio manager of its US technology strategy. “At 25 times forward earnings it still looks pretty affordable.”
The demand for Nvidia’s hardware will accelerate in 2024 and its forward earnings multiple could soon look like a bargain.
MJ Gleeson (GLE)
Investors have failed to appreciate the benefits of this developer’s market niche, writes Mitchell Labiak.
MJ Gleeson is not a typical listed housebuilder. While the houses it is building at The Pastures, its 120-home development in Bilsthorpe, sell for a new-build premium above the average house price in the area, £211,995 for a three-bed home is still far cheaper than both the UK and FTSE 350 housebuilder average.
This price point is the key to its investment case. While larger peers chase higher margins by purchasing prime land in wealthier locations and developing expensive homes, MJ Gleeson buys brownfield or reclaimed land at a discount in places the major housebuilders never tread and where development is cheap. The upshot is MJ Gleeson is often one of the only bidders on the sites it acquires across the Midlands and the north of England.
Its model also translates to one of the sector’s lowest operating margins — and more than 10 percentage points below that of London-focused developer Berkeley. But while Berkeley has halted development work, ostensibly due to overly burdensome regulation, MJ Gleeson is ploughing ahead and increasing its forward sales pipeline. If the mark of a solid investment in the sector is the avoidance of violent boom-to-bust sales cycles, then MJ Gleeson possesses strengths that its better-known peers do not.
Indeed, sensing the mood music, some larger rivals are doubling down on the affordable housing theme, building for lower price points. Meanwhile, MJ Gleeson’s focus has been steady for years, and the fact others are now following suit suggests its niche is better suited to the current moment in the housing cycle.
Investors have failed to see this. As well as trading at less than 11 times forecast earnings, MJ Gleeson shares change hands for less than their net asset value. This is an unjustified discount for a business building a stable future, and analysts agree. Assuming the shares re-rate in line with its forecasts, Investec reckons MJ Gleeson offers greater potential reward than any other FTSE 350 housebuilder.