Investment Column: Self-help makes Cobham a defensive bet

Trinity Mirror; Psion
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The Independent Online

Our view: Hold

Share price: 224.6p (+15.7p)

At first glance, yesterday's full-year figures from Cobham have much to recommend them. Underlying pre-tax profits were up by a healthy 4 per cent to £306m, on revenues broadly flat at £1.9bn, thanks to an improvement in margins to 18.3 per cent.

That's not all. The aerospace and defence group's order intake rose by 3 per cent to £1.8bn, including a tasty 7 per cent rise in the technology division, while it saw £219m in free cash flow and the net debt-to-earnings ratio dropped to 0.8.

Add in a 10 per cent rise to the dividend, taking it to 6p, and a £150m share buy-back plan, and is it any wonder that the stock rallied last night?

To be sure, there are clouds on the horizon. Most obviously, planned defence-spending cuts, particularly in the US, weigh heavily on the group's prospects. There are also shivers in the slowly recovering civil-aerospace market as the oil price soars on concerns about the Middle East, enough for the International Air Transport Association to cut its 2011 net profit forecast for the industry the other day.

Andy Stevens, the Cobham chief executive, acknowledged the group's "prudent view of top-line growth" for the current year, stressing the company's "accelerated integration plans" to deliver £21m of cost savings in 2011.

More bearish analysts, such as those at Evolution Securities, responded with scepticism, saying that while cost savings and share buy-backs were good, the fact that Cobham's slugs of cash "cannot be better reinvested in acquisitions or new technologies" only highlights the difficult market backdrop.

But Cobham is working hard to insulate itself from the ructions over defence spending, in our view, not least via the $175m-worth of acquisitions in the more reliably expanding homeland security market in recent months.

We acknowledge that the stock has come off since last spring and that the outlook is choppy. But now is not the time to sell. Hold.

Trinity Mirror

Our view: Hold

Share price: 66p (-18.25p)

You would not have guessed it from the performance of its share price yesterday, but Trinity Mirror's preliminary results revealed better-than-expected profits.

The damage was caused by its rather cautious outlook statement, with the newspaper group predicting "a volatile and slow recovery in the UK economy".

Meanwhile, those hoping for resumption of dividends were disappointed, with Trinity saying that, despite "making progress towards the reinstatement of dividends", payouts will be made only when trading conditions improve.

In another boon for the bears, advertising revenues for its national papers fell by 9 per cent in the past two months. That said, investors should take comfort from the reduction of its pension deficit as well as its improved net debt figures.

The company also said that it is aiming for at least another £10m in structural cost savings, though it did warn that this "will be more than offset" by a sharp rise in newsprint prices, investment in the business and general inflationary factors.

And yet, yesterday's sell-off looks overdone, especially in light of the already-thin valuation prior to the results. This opens the door to some upside ahead as bargain hunters move in. That argues against a sell stance, while the uncertain outlook weighs against too bullish a view. Hold.


Our view: Buy

Share price: 90.5p (-1.5p)

Psion, which has reinvented itself in recent times as a manufacturer of rugged hand-held computers for commercial and industrial use, issued what by all accounts were sterling results last night. It has swung into a full-year pre-tax profit and increased its dividend.

Even better, the company said the improvement in sales that was seen in the second half of 2010 had persisted into the new year, boding well for future performance.

This is important as it should aid management in moving closer to its interim goal of improving operating margins to 10 per cent. Success on that front should boost the stock, which on some metrics trades at a 45 per cent discount to its international peers. Such a wide gap alone would be good reason to consider a positive recommendation on the stock, but yesterday's results suggest the gap should begin to narrow soon. Buy.