The Investment Column: Cookson's sensible acquisition boosts growth prospects

Air Partner; The Innovation Group
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The Independent Online

Our view: Buy

Current price: 840p

Three months ago, this column recommended a hold on the engineering group Cookson because it was difficult to see significant upside in the face of strong recent performance and the dollar headwind. Well, since then the shares have outperformed the market and climbed more than 20 per cent.

So is there any more upside left in Cookson? Yesterday's £497m acquisition of Foseco certainly changes the outlook from good to even better, and it looks like a sensible price at 16.3 times forecast 2008 earnings.

Senior management at Cookson have transformed the business into a stable growth business with a strong balance sheet. This deal, and the market's reaction to it, shows just how far the company has progressed and the faith investors have in management.

To raise some cash for the offer, Cookson placed 18.6 million new shares in the market yesterday, significantly at a better price than Wednesday's close. Cookson believes the acquisition will generate more than £18m of synergies over the next two years. There are also strong cross-selling opportunities.

So what does Foseco bring to the table? Cookson's steel business, where it is the world's largest supplier of flow control refractory products, should be the primary beneficiary. The deal bulks up Cookson in foundries and the steel businesses complement each other perfectly.

Although the Foseco acquisition is not expected to affect current-year earnings, the deal makes compelling sense. Cookson trades on an undemanding 13.6 times forecast 2009 earnings, not including Foseco – good value considering the impact Foseco could have on earnings and future growth prospects. An upgrade to buy is overdue.

Air Partner

Our view: Risky buy

Current price: 1,310p

The way the market is performing, there should be a Lear Jet in every garage by 2010. Well, maybe not, but you don't necessarily have to be a billionaire to find yourself on a private jet these days.

Air Partner has been involved in the private jet business for more than 40 years, and if yesterday's full-year results are anything to go by it will be involved for many years to come. The business consists of two main divisions – private jets that fly small groups of people and commercial jets, much larger aircraft that can transport significantly higher numbers of people. Most of its business comes from commercial custom-ers and government contracts, with only about 7 per cent of business coming from private customers.

The numbers themselves were excellent. A 32 per cent jump in sales to £185.8m led to a 49 per cent increase in pre-tax profit of £7.6m. It will pay another special divi-dend, this time 60p per share, its fifth in the last 12 years. The company came to the market at 75p and has paid out 273p per share in dividends since then.

Air Partner makes its money as an air charter broker – sourcing aircraft to corporate, private and government customers. The company does not own any of its fleet but through its long-term relationships with private jet operators is able to source the best available aircraft for its customers' needs.

The outlook for Air Partner looks very encouraging. The balance sheet is strong and its wide geographic and customer spread should lend it some defensive qualities – something investors would presumably not normally associate with private jets.

The shares are thinly traded – the normal market size is just 1,000, and the stock is not exactly cheap at approximately 23 times forecast 2008 earnings. But with strong fundamentals and excellent growth pros-pects, for investors with a healthy appetite for risk these shares could continue to fly. Buy.

The Innovation Group

Our view: Buy

Current price: 33.75p

The Innovation Group has eased fears of a disappointing second half after upgrading forecasts for the year on the back of a welcome rise in software revenue. It has also acquired one of its key rivals in the automotive insurance claims processing market, Nobilas Claims and Fleet Solutions, a division of Akzo Nobel – a bargain at £600,000.

It has to absorb substantial losses – some £9m last year – but analysts believe TIG will turn the unit around quickly. Akzo set up the company so that its paint was used for more car repairs and despite processing some 250,000 transactions in the UK a year – more than TIG – it has struggled to make a profit.

Three years ago, TIG was an also-ran in the software business. Yet the company has successfully transformed itself into a niche business process outsourcing provider, with recurring revenue accounting for nearly 80 per cent of its business.

Although it is still a minnow, its growth matches that of BPO champions Capita and Xchanging, and the recent £25m deal with Royal & SunAlliance shows it has potential. TIG's shares are at the same level as in 2004 and its valuation of 14 times 2008 projected earnings does not reflect its growth potential. Buy.

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