Investment: Babcock back in the black

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The Independent Online
GIVEN THAT Babcock International has just returned to profit after five years of losses, executives could be forgiven a twinge of disappointment at yesterday's stock market reaction.

The engineer turned in half-year profits of pounds 11.0m, against a pounds 14.5m loss in the same period last year. But the shares, up 2p to 63p, barely beat the market. Does the management deserve a bit more credit?

Babcock is split into two businesses: facilities management and materials handling. In facilities management, the company made a breakthrough last year when it bought the Rosyth naval shipyard. One of its first tasks was to refit HMS Splendid, a nuclear submarine, to fire Britain's new Tomahawk cruise missiles: the first test went ahead on Wednesday. It now has guaranteed refitting orders until 2007.

By the company's own admission, however, what would otherwise have been a tremendous turnaround was marred by economic turmoil. Babcock admits its materials handling division, which accounts for more than a third of group turnover, will continue to suffer.

But there are other reasons for optimism, such as the recent securing of new engineering contracts with Severn Trent Water. The company also has pounds 35m in cash to spend on acquisitions - compared with a market capitalisation of pounds 104m.

The stockbroker ABN Amro predicts full-year profits of pounds 21m. That represents a forward p/e multiple of 6.5 on yesterday's closing price of 63p - much cheaper than the market and slightly cheaper than its peers. With the guaranteed revenues from Rosyth providing some certainty, the shares are a bargain for the bulls.