Babcock International: Underperformance and Overcomplexity

In our opinion, Babcock International needs to write down the value of its Defence Support Group (DSG) subsidiary, which was acquired for £148 million. According to our calculations, Babcock DSG has overvalued its main contract by £50 million, based on an average assessment of underlying operating profits. An impairment on this scale would be equivalent to 12.8% of Babcock’s pre-tax profits. Based on a pessimistic assessment of DSG’s performance, the impairment would be £75 million – equivalent to 19.2% of pre-tax profits.