Bottom Line: Babcock International goes for a high-cost recovery

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The Independent Online
AFTER a good six months of analysis Dr John Parker, chief executive, and his new management team at Babcock International have emerged with a commendably coherent plan to move the company out of crisis and into recovery.

The cost is high. Babcock's ailing energy division, main cause of the company's woes, will see its workforce at Renfrew halved within an overall loss of 450 jobs in a pounds 25m restructuring programme.

Shorn of a final dividend, shareholders - in order to repair a ravaged balance sheet where net assets have been halved by after-tax losses of pounds 42.2m - are being asked to stump up pounds 78.6m by way of a four- for-seven rights issue at 27p. Undeterred, Babcock shares rose 3.75p to 37p in a clear vote of confidence.

Dr Parker, who is due to take over as chairman from Lord King when he retires in July, has taken, with the help of LEK Partnership, a brave and imaginative series of decisions over the future of the energy division. Problems here were highlighted in November with news of a pounds 15m provision for a gas desulphurisation contract at National Power's Drax power station.

Babcock has decided that it is hopeless to try to compete in Asian and Pacific markets from a high- cost UK manufacturing base. In a far-sighted move it has formed a partnership with Wuhan Boiler Works of China to do basic fabrication while retaining high value- added manufacturing and design work at Renfrew.

A much strengthened balance sheet will allow greater investment in its more successful divisions spanning process engineering, materials handling, facilities management and Africa.

Pre-tax profits of pounds 20m in the year to next March should allow a 1p dividend. A prospective yield of 3.3 per cent underpins the shares at the start of a three-year recovery plan that should see outperformance.