US Edition Babcock International
480p +68p
Questor says Buy
Recession, what recession? Babcock International, the engineering services company, seems to be thoroughly enjoying the economic downturn after reporting a 22pc rise in revenue to £1.9bn and a 26pc increase in
pre-tax profits to £106.7m.
As a result Babcock has increased its dividend total 25pc to 14.4p, a welcome move amidst an environment characterised by corporate belt-tightening and unwanted fund-raising activity.
Shares in Babcock International surged 16.5pc to 480p, making up some of the 30pc decline in the share price over the past year.
Yet whilst the results were impressive, Babcock chief executive Peter Rogers pointed out that the performance was almost precisely where consensus forecasts were 12 months ago. So why the excitement?
The answer lies in a 90pc increase in the company's order book to £5.7bn, a whopping increase. Mr Rogers further frustrated the naysayers by pointing out that the company's £4bn contract pipeline was the highest it has seen in at least four years. He explained that the company's customers – predominantly government departments – are looking to cut costs by outsourcing more work.
Despite continued weakness in its rail division, the rest of the company remains on track. Its marine unit, which makes up nearly half of group revenue, was the star turn with revenue rising 41pc last year. The unit, which manages Royal Navy bases and refits nuclear submarines, is looking to continue its international growth this year after winning a five-year deal with the Canadian navy last year.
Yet investors should also consider Babcock's nuclear division which is well placed to benefit from the Government's support for the building of new nuclear power stations over the next decade. Babcock is one of the few companies in the UK that can provide specialist fuel handling, delivery and removal services for the nuclear industry and it employs some 2,000 staff in the UK. With nuclear back in the spotlight, Mr Rogers said he expects to double the size of its nuclear business over the next three to four years.
It's not just on the operating front that Babcock is steaming ahead. It has become the first company in the UK to reduce the impact of pensioner longevity by transferring the risk element
on some £750m of pension liabilities to a third party. It has almost completed the deal and actuaries around the country
are bracing themselves for a
rush of companies looking to follow in Babcock's footsteps.
Prior to the share jump, Babcock traded on a price-earnings ratio of less than 10 times next year's forecasts, a heavy discount for a seasoned performer. With Arbuthnot and KBC Peel Hunt setting a target price of 550p to reflect continued growth this year, the engineer still looks undervalued. Buy.
Housebuilders
Questor says Hold
Shares in the UK’s leading housebuilders are all in positive territory for 2009, with Taylor Wimpey rebounding from last year’s annus horribilis to the tune of 251pc.
The sector was given more hope this week as the Royal Institution of Chartered Surveyors recorded the highest number of new buyer enquiries for a decade and Redrow said it plans to restart housing developments after downing tools at many of its sites as the economic crisis hit.
However, with investors still licking their wounds from severe losses which saw all the housebuilders drop out of the FTSE 100, Questor believes more sustained signs of a market improvement, and the companies’ ability to take advantage of an upturn, are required.
Redrow’s gains so far this year are primarily due to the return of founder Steve Morgan following a boardroom coup. The shares have gained 44pc since March and, with a switch from apartments to family homes alongside a restarting of work, investors are welcoming an experienced and forceful leader in difficult economic conditions.
However, the company was still warning yesterday of a “challenging” market until 2010 with “fragile” pricing and “continued restrictions” on mortgage availability. Its recommencement of building across the majority of its 80 sites, while a positive sign, is from a context of a severe reduction of new home stock amid economic turmoil.
While the companies talk of improved visitor levels and lower cancellations this year, margins are under severe pressure because of the incentives being offered. Persimmon, for example, said sales were “ahead of expectations” in the first quarter of 2009, but revenue is still down 30pc year-on-year at roughly £960m.
Given the cumbersome debts endured by many of the housebuilders, with the notable exception of Tony Pidgeley’s agile Berkeley, it is doubtful whether they can take significant advantage of any upturn anyway without highly dilutive cash calls. Taylor Wimpey led the way last Friday with a £510m fund-raising at a 48pc discount. Given that Barratt has £1.4bn of net debt to a market capitalisation of £527m and even Redrow £235m to £304m, more cash calls cannot be ruled out.
The rally of 2009 should be seen in the context of housebuilders securing refinancing packages vital to their future. The market that they operate in is still under pressure and, although there is more hope than last autumn, investors should wait for more foundations to be laid.