Broker snap: Babcock sees solid results

9th Nov 2010 12:37

Despite profit being 2% below Panmure Gordon's forecasts, the broker has retained its 'buy' recommendation for Babcock International after a "solid set of first half results".Engineering support services group Babcock delivered an adjusted pre-tax profit of £90.9m, below Panmure Gordon's forecast of £93m, but an improvement on last year's figure of £71.8m."Marine once again delivered a robust growth and margin performance, with the company seeing lots of opportunities in its Defence business."While US operations remaining stable and in line with expectations, South Africa continues to go "from strength to strength", the broker says.The broker notes that the integration of VT is progressing well, with Babcock confident of achieving the merger benefits of £50m by 2013.A better-than-expected cash conversion of 189% brought net debt down to £796, compared to the broker's forecast of £861.1m. That has given the company scope to bump up the interim dividend by 8% or so, in line with the group's avowed intention to stick to a progressive pay-out policy.Panmure maintains its target price of 750p, based on 13 times the projected 2013 earnings per share value, and with an excess of 30% upside potential, it confirms a 'buy'.KBC Peel Hunt is also a buyer of the shares, but won't be adjusting its full year estimates after the "in line" interim results. "While we remain of the view that the impact from the Strategic Defence Review (50% of Babcock's activity is UK MoD) and Comprehensive Spending Review is yet to filter to company level, we believe our estimates cover the risks of (1) procurement disruption arising from client hesitancy as programmes (existing and new) are reviewed (2) contract re-profiling to reduce activity and (3) margin pressure as government exerts its buying power and influence," said Peel Hunt analyst Andrew Nussey. "While Babcock is not immune to a reduction in government spending, we believe the migration towards incentive-based procurement is positive for returns," Nussey said.