War in Iraq will mean increased demand for Cobham's supplies

French Connection has room to grow; Educated move by Havelock makes it a buy again
Click to follow
The Independent Online

A business which supplies components for guided missiles might not be everyone's cup of tea but Cobham has proved to be a stable operator in the world of aerospace and defence. And with a potential war looming with Iraq, businesses like this stand to see increased orders, particularly in the US where Cobham has already seen an big increase in demand for things such ashelicopter parts and in-flight re-fuelling systems after the events of 11 September.

A business which supplies components for guided missiles might not be everyone's cup of tea but Cobham has proved to be a stable operator in the world of aerospace and defence. And with a potential war looming with Iraq, businesses like this stand to see increased orders, particularly in the US where Cobham has already seen an big increase in demand for things such ashelicopter parts and in-flight re-fuelling systems after the events of 11 September.

In fact, military components such as the Hot Spot Spectral Flare made by Cobham's Wallop Defence Systems (it is based in Middle Wallop, Hampshire) account for only 43 per cent of Cobham's sales. The rest is made up of commercial and industrial sectors where Cobham's supplies parts to Airbus and precision engineering components to major industrial manufacturers.

This spread of interests has made the group more resilient in turbulent markets as has its lack of reliance on any single customer. This was underlined by yesterday's half-year results which were ahead of many forecasts at £42.7m (against £41.1m last year).

It was a mixed picture with the military business performing well but orders from commercial customers such as Boeing under pressure. The order book is strong at £1.3bn but while the military division still looks promising the company said it does not expect the commercial aerospace sector to recover before 2004.

The other disappointment was Westwind, the division which makes bearings for drills for use in the printed circuit board industry, which made a loss in the first half. Bought for £75m six years ago the business is now seen as non-core and may be sold.

But despite all this, net margins grew to 14.1 per cent from 13.6 per cent and cash generation was strong at £61m. The avionics business recorded another record result and Westwind has returned to profit in July and August.

The outlook is stronger in the second half and there will not be too many aerospace and defence companies that will post profit growth this year.

The shares were up a penny at 1,010p yesterday putting them on a forward price-earnings ratio of 13. ING has a share price target of 1,150p. Buy.

French Connection has room to grow

French Connection may wish to consider printing one of its fashionable T-shirts with a new slogan: FCUK the stock market.

The retailer has seen its shares slump in the last few months, along with its high street rivals, on the back of fears that consumers really have packed up their shopping bags and gone home.

Yet French Connection demonstrated yesterday that it has been unfairly lumped in with the likes of Next and Debenhams, where sales growth has disappointed the market.

French Connection, which also owns the upmarket Nicole Farhi chain, has a very different story to tell. Like-for-like sales were up 5 per cent in the UK in the six months to 31 July. The company has managed to boost its gross margin because it escaped the mistake made by others of buying in too much stock which then had to be sold off at heavy discounts. Overall pre-tax profits increased 20 per cent to £10.0m, sending its shares up 5 per cent to 835p.

The company is still a little frayed at the edges. Its US wholesale arm, which sells French Connection clothes to department stores, has a long way to go to recover to pre-11 September levels. It has suffered from belt tightening by US store buyers, which has hit sales and eroded margins.

The company says this situation is improving now and it has a long-term goal of boosting its presence in the US, where it has 32 stores compared with 70 which are mainly in the UK.

While French Connection is now a mature business in the UK, it plans to seek further growth from enlarging stores and a few more openings. Other ventures include copying its successful men's toiletry range it runs through Boots, with one for women. The company also plans to expand other non-clothes lines such as shoes and accessories.

WestLB Panmure forecasts full-year profits of £26m for French Connection, putting it on a forward p/e of 9.

Unlike its clothes, the shares are cheap compared to the sector, though concerns over consumer spending may act as a brake on growth. But it may be worth popping a few in the bottom drawer.

Educated move by Havelock makes it a buy again

Investors who followed our tip in April to buy shares in Havelock Europa at 43.5p have enjoyed a good run. The shares closed up 7.4 per cent at 65p yesterday, meaning they have now doubled in a year.

The company's strategy of diversifying away from the seasonal business of fitting out high street shops finally seems to be paying off. In buying up a company that fits out school classrooms as well, it has found new growth prospects and should benefit from increased government spending on education.

The shift has helped Havelock make a first-half profit for the first time in five years. Pretax profits for the six months to 30 June were £754,000 compared with losses of £1.5m a year before. Sales jumped 42 per cent to £34.5m, mainly due to an £8.2m contribution from recently acquired ESA McIntosh, its educational furniture business.

One of the company's two house brokers, Teather & Greenwood, points out that the company's balance sheet needs some work. Havelock's £18m of debt is almost equal to its £20m market cap.

But, the company envisages a "useful reduction" in debt by the end of the year and, better still, says all its businesses have strong order books.

Teathers is looking for a pre-tax profit of about £3.9m this year, on sales of about £83m, translating to earnings of 8.8p a share. That puts the stock on a forward multiple of just over seven times.

Despite the good run, the rating does not seem particularly demanding. And given the early stage of the turnaround and the balance sheet issues, the shares still look attractive.

Comments