Refuelled and ready to take off

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The Independent Online
IN ITS old name of Flight Refuelling, Cobham, at 506p, was a stock market star in the 1970s and early 1980s. The end of the Cold War and the disappearance of the old cost plus defence contracts brought the gravy train to an end, leaving the group struggling just to maintain profits. But there are increasing signs that the long plateau in profits is over and a new period of vigorous growth lies ahead.

Why? First are the signs of stabilisation and even a pick-up in defence spending. Governments want to improve the efficiency of their military forces and also incorporate advances in technology. Second are the big mergers transforming the industry such as the recent Lockheed/ Loral deal. Cobham chief executive, Gordon Page, is hopeful that these will throw up acquisition opportunities if the merged groups find divisions which no longer fit. Lastly the group has recently made an acquisition taking it out of the defence and civil aerospace industry into a new field of engineering technology.

By any standards the Westwind deal, financed by a rights issue at 375p, which closed last December, looks a cracker. Westwind is the world leader in air bearing spindles for niche applications. Helped by a management buyout in 1993, sales are expected to have trebled to pounds 25.8m between 1992 and calendar 1995 while pre-tax profits should have risen from pounds 1.1m to pounds 8m. The business is being acquired on terms which should be earnings enhancing in 1996. The two men who led the buyout could make a further pounds 3.5m if profits grow by a compound 20 per cent a year through to 31 December 2000.

Such a performance looks highly achievable given the rising number of applications for air bearing spindles, the backing from a larger group, and the global opportunity facing a business which exports 90 per cent of sales. Air bearing spindles are ideal where cleanliness and great accuracy are required with applications in such fast-growing markets as printed circuit board manufacture.

A well-judged acquisition also had a key impact on the group's core business providing equipment for in-flight refuelling. In September 1994, the group bought the business of its US counterpart, Sargent Fletcher, a company which was in Chapter 11 receivership. Subsequently it has won the biggest order in in-flight refuelling history to equip 75 US planes with its system at a value of more than pounds 1m a plane.

The impetus to what has been strongly growing demand for Cobham's in-flight refuelling equipment has come from the Falklands and Gulf wars. They first demonstrated the value of extending the range of military aircraft. In the Gulf war it was found that modern war planes are so heavily laden that they can only take off with half-empty tanks, topping up once they are airborne.

Further large orders from Middle East countries look likely. Meanwhile there is plenty of business around to give this division a good year in 1996.

Interim results last October showed how the group had finally lifted profits from an eight-year plateau. Even in those difficult times the group managed to raise its dividend in all but one year when it held steady.

Analysts are looking for 1995 pre-tax profits to top pounds 29m against pounds 22.8m and reach pounds 42m in 1996. On those figures the price/earnings ratio falls to around 20 and then 16.5 which looks undemanding for such a high-quality business.