The Investment Column: Redrow's generosity has firm foundations

Cobham; IP Group
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The Independent Online

Our view: Hold

Share price: 570p (+40p)

Redrow is now firmly in the phase of heavily rewarding its shareholders. For the past three years, it has lifted its dividend by 20 per cent annually. It did so again yesterday and promised to repeat the trick in the next two years. By 2008, the housebuilder will have increased its payout to investors by 2.5 times.

Why is Redrow being so generous? Simply, because it can afford to be. Although the group yesterday posted a 13 per cent drop in annual pre-tax profits to £120m, its balance sheet is in great shape. Cash flows cover dividend payments 4 times and the company has little in the way of debt to service.

Yesterday's results reflected a period when the UK housing market was experiencing considerable weakness. But the worst seems to have passed now. Redrow said the housing market had enjoyed a recovery this spring and that sales reservations in the first nine weeks of its new financial year registered a 10 per cent rise.

The housebuilder also reported good progress with its Debut range of affordable homes, aimed at first-time buyers. The price of these varies from £50,000 to £110,000. So far, the group has built 215, mainly in the north of England and the Midlands. It is now planning its first site for the South-east - in Kent. Thanks to the ultra-efficient method of construction Redrow employs, it is able to make pretty much the same financial returns on building these homes as on more expensive ones.

As for Redrow's landbank, it remains one of the best in the sector. In the past year alone, it increased its size by 21,000 plots, representing more than four years of supply.

Following yesterday's forecast-busting figures, the group's shares closed 7 per cent higher. But, even after this rise, the stock trades at less than 10 times forward earnings, which is not expensive, especially when the possibility of a bid for Redrow is factored in.


Our view: Buy

Share price: 175.25p (+5.25p)

The United States has never spent as much on military equipment as it does today. Defence spending by the world's only superpower is expected to hit $500bn (£267bn) this year and is likely to continue to rise as it gets increasing bogged down in the quagmires that are Iraq and Afghanistan.

Therefore, it seems wise that Cobham is focusing its attention on selling military equipment to the Americans. Over the past 12 months, the proportion of the group's revenues generated by business across the Atlantic has risen by a third to 45 per cent. Yesterday the group, which makes avionics, antennas, aircraft oxygen systems, fuel pumps, defence electronics and air-to-air fuelling equipment, unveiled a 13 per cent jump in underlying pre-tax profits to £78m for the six months to 30 June.

Since announcing plans to focus the group on more high-growth sectors a year ago, Cobham's management has made eight disposals which have raised £260m. Alongside existing resources, this has left the group with a potential war chest of more than £350m for acquisitions. Any purchases are likely to see it expand in hi-tech US markets.

Cobham shares trade at 15 times forward earnings, which is by no means cheap. However, investors should not forget that the company operates in a high-growth industry - and one that will remain so as long as the US stays entangled in various disputes in the Middle East and Afghanistan.

These market conditions, coupled with future acquisitions, look set to drive earnings growth in the years ahead. Meanwhile, Cobham's strong position in what are niche markets make it a prime takeover candidate for a bigger defence group.

IP Group

Our view: Buy

Share price: 130.5p (-0.75p)

IP Group, formerly IP2IPO, was the first to realise the wealth hidden behind the doors of British universities. It discovered that although this country's universities have a long and established reputation for producing world-class science, this academic renown has often not been translated into commercial success.

So, IP has spent much of the past five years securing partnership deals with the UK's leading universities, including Oxford's chemistry department, Kings College London, Bristol, York, Bath and Southampton. These have been the foundation for IP's rapidly growing portfolio of companies and yesterday's interim results from the group clearly showed its strategy is working.

It reported a tenfold increase in pre-tax profits (calculated by adding up the rise in the value of its portfolio of firms) to £30.3m, a figure which easily beat City forecasts. IP now has nine long-term partnerships with UK universities (investors should not be surprised if it secures a 10th before the end of the year) and equity stakes in 47 companies - 8 quoted and 39 unquoted. This makes it by far the biggest and most experienced player of its kind in the field and well worth backing.