Babcock shares dive 12% on bigger losses, negative cash view

(Reuters) -British engineering firm Babcock warned that free cash flow would be significantly negative this financial year as its annual loss soared on a 2 billion pounds ($2.8 billion) writedown, sending its shares down as much as 13%.

The company, whose biggest customer is Britain's Ministry of Defence, said its operating loss widened to 1.64 billion pounds in the year ended March 31 from 75.6 million a year earlier, with impairments mainly due to reduced cash flow expectations from its land and aviation businesses.

Babcock said free cash flow - a sign of a company's health and ability to pay down debt - would take a big hit from pension contributions, restructuring costs and a 20 million pound provision for an Italian antitrust fine affecting its Mission Critical Services unit.

Chief Executive David Lockwood, however, reaffirmed that his plan to turn around the group did not involve an equity raise - a move that was welcomed by investors in April.

Instead, plans include disposals of at least 400 million pounds and what it called a new operating model, involving a reduction in management layers that will results in about 1,000 layoffs.

Babcock plans to sell its oil and gas aviation business which transports workers to rigs and is reviewing parts of its aerial emergency business, which provides search and rescue, firefighting and medical services.

"Some particulars that relate to capital will take longer but we'll get through the bulk of (the turnaround plan) in financial year 2022," Lockwood told Reuters.

Babcock began a review of its balance sheet and contract profitability this year after it hired Lockwood and financial chief David Mellors from defence peer Cobham.

The company, which also manages naval bases and looks after submarines, said higher COVID-19 costs and uncertainty over new variants mean it did not expect easing restrictions to boost its profitability.

The pandemic has hurt its civil aviation business while social distancing rules have hit productivity and margins, as many of its jobs involve working in close proximity such as in ships and submarines.

Analysts at Jefferies estimate a free cash outflow of between 260 million pounds and 280 million pounds in 2022.

Babcock shares were down 11% by 0918 GMT, hitting their lowest since April when they had been boosted by relief that its recovery plan was not expected to include a cash call.

($1 = 0.7173 pounds)

(Reporting by Yadarisa Shabong in BengaluruEditing by Ramakrishnan M. and David Holmes)

By Yadarisa Shabong