Babcock International, one of the UK’s largest defence contractors, reported a 19% fall in underlying operating profits to £293.3 million for the financial year ending March 2026, as a £140 million charge on its contract to build five Type 31 frigates for the Royal Navy dragged down results.
The company said the contract, awarded in 2019, included only “certain escalation clauses” that provided “limited protection from the macroeconomic changes of recent years relating to Brexit, Covid, raw material prices and UK labour shortages, which have significantly increased our costs.” The result, Babcock said, was that the contract had become loss-making, with additional upward pressure from the maturing of the frigate design and rising forecast labour costs. The company was also forced to make late-stage design changes to the first two ships in the five-vessel fleet.
Shares in Babcock fell more than 3% on Monday after the trading update.
The defence contractor has been waiting alongside the wider industry for the UK government to publish its long-awaited defence investment plan, a process that has seen delays and internal political turmoil. Earlier this month, Defence Secretary John Healey resigned amid a dispute with Prime Minister Keir Starmer over the plan.
“The long-term trend remains clear,” Babcock said of military demand. “Demand is increasingly structural, driven by the need for more advanced, adaptable and integrated capability.”
David Lockwood, Babcock’s chief executive, who is set to leave the business at the end of the year, described the company’s overall performance as “continued strategic and operational progress” against “an increasingly uncertain geopolitical backdrop.”
Excluding the loss-making Type 31 frigate contract, Babcock said its operating profits rose 19% to £433 million, with its nuclear and aviation divisions both performing strongly and margins improving.
The company’s forward order book stood at £9.8 billion, down from £10.4 billion a year earlier. New business wins included an expansion of Babcock’s existing partnership with HII, the largest military shipbuilder in the United States, to now encompass a nuclear submarine programme.
Babcock also published illustrative sensitivity scenarios for the Type 31 contract’s costs. The company said a 10% increase in estimated production hours would widen losses by £29 million, while a 10% rise in the average labour rate would add £34 million to the contract’s loss. A six-month delay to the production schedule would increase the loss by £15 million.
Aarin Chiekrie, an analyst at Hargreaves Lansdown, said Babcock played down the long-term impact of the frigate contract and added that the company appeared well positioned to benefit from rising global military budgets. “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 extra spending,” Chiekrie said.