Leave Chrysalis in its cocoon

Babcock; Redstone  
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The Independent Online

Chrysalis put out a set of figures yesterday that were encouraging but for one very large black mark: new media.

While this radio, TV, music and publishing group is hardly alone in losing its shirt on the internet, it seems to have had a particularly unhappy experience. Internet investments were yesterday written down to zero and the new media division closed. The company raised £26.8m from shareholders for internet investment last year. This now appears to have been a waste of time and effort.

After booking £22.4m of new media losses, Chrysalis reported loss of £16.8m, for the year ended 31 August.

Excluding new media, earnings before interest, tax and write-downs for core businesses were up 31 per cent at £12.4m. The real star turn was radio, where turnover rose 18.3 per cent to £44.0m, compared with an industry decline of 0.2 per cent in the same period.

While most radio companies are looking at shrinking sales on the back of a savage downturn in advertising, Chrysalis yesterday stated that the current year would see radio revenues grow 5 per cent – while the sector as a whole is looking at a drop of 6 per cent.

Chrysalis manages this because it has a young radio business with audiences growing rapidly – allowing it to ramp up advertising charges in line with listener numbers.

The company's music business offers reliable earnings, as testified by a securitisation of some future income.

Other interests, such as book publishing, CD distribution and TV production (including the new Richard & Judy show) are fine but are too small in their markets. Analysts suggest Chrysalis should grow one or two of these and sell the remainder. The stock has rallied from a low of 137p in October to close yesterday down 2.5p at 215p. Numis, the broker, expects 2002 earnings of 1.8p a share, leaving the stock on far too chunky a rating. Avoid.

Babcock

Babcock International might be called Bab-cock-up. The business has been trying to transform itself from an engineering firm into a facilities management group, providing its services to the armed forces, among other sectors.

So far this has been met with only limited success. The previous management opted not to sell the main "old Babcock" materials handling business a year ago after putting an unrealistic price on it. The division has since slumped into loss and, though still up for sale may only be worth £15m. Its move into railway services was a disaster too and the loss-making Railcare unit has since been sold. But there is a chance things are starting to look up following the appointment of Gordon Campbell as chairman and chief executive. Babcock's £61m acquisition of Hunting Defence Services earlier this year takes the group further into its chosen area of providing support services to the military. Furthermore, it believes some of these skills, like looking after buildings, training and machines, could be used in other areas such as the police force.

The traditional BES engineering support business which provides refurbishment work on aircraft carriers and submarines at the Rosyth shipyard has proved a mainstay. Indeed yesterday saw the Queen Mother visit the Ark Royal, which has just enjoyed a £140m refit. But with only three or four years more work left there the pending decision on the contract to manage the Clyde Naval base is crucial.

The strategy is potentially interesting though Babcock will need to prove it can battle it out with rivals like Vosper Thorneycroft and Cobham.

Yesterday's interim results for the six months to 30 September showed operating profits before expceptionals down to £7.1m from £7.8m in the same period last year. Full year profits could be £13m, putting the shares, up 6p at 79p yesterday, on a forward p/e of 11. A speculative buy.

Redstone

Redstone Telecom yesterday issued its first set of financials since emerging from the traumatic events of the summer. While it is reassuring to see management has moved quickly to cut costs, it is clear that much remains to be done. Pre-tax losses in the six months ended 30 September were £22m compared with an £8.9m loss in the same period a year ago. Sales were £44.9m, up from £40m last year. As expected, there were heavy restructuring costs and the company had written down the value of its network and infrastructure assets.

Redstone, which has £14m of cash, is hoping to be profitable on an Ebitda, or underlying, basis before the end of March. But this is a company that, only a few months ago, came within a whisker of going bust and that still has a job on its hands to deliver on its strategy.

Trading needs to pick up, as does the company's gross margin. Management sound determined but until the business has stabilised the stock continues to be too high risk.

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