Investment Column: Uncertainty clouds Cobham's prospects

Liberty International; Interserve
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The Independent Online

Our view: Hold

Share price: 189p (-16.5p)

When this column last looked at Cobham, which makes aerospace and defence systems, six months ago, the verdict was a "hold". At the risk of being boring, and despite some upbeat assessments of the potential for the US armed forces budget under Barack Obama, it is still a "hold" today.

It's not that Cobham isn't doing well. Yesterday's trading update emphasises "strong organic growth" in the first nine months of the year, alongside expansion from acquisitions including the $425m (£263m) purchase of M/A-COM in September and GMS for $62m in October. The group's sensor and antenna systems division is the stellar performer, with $77m-worth of business from the US Navy to produce low-band transmitters and antennae. Net debt of £475m at the end of the third quarter, against an order book worth £2.5bn, suggests the board's confidence may be justified.

City analysts are largely positive about the company. Numis is keeping its 15 per cent earnings growth forecast. Deutsche Bank lists Cobham as a "top pick" in defence, and says that suggestions that spending on the armed forces will fall in a climate of economic uncertainty are historically inaccurate. Merrill Lynch goes so far as to speculate that President Obama could turn out to have a more benign effect on the US defence budget than the maverick John McCain.

But it is an unreliable world out there. Notwithstanding the good news, Cobham shares dropped more than 7.5 per cent yesterday, although some traders blamed general market volatility, and cash-strapped investors cashing in on the company's recent 20 per cent price rise, rather than specific concerns about the company or its market. Hold.

Liberty International

Our view: Sell

Share price: 733p (-25p)

Whether it is falling property values or the tumbleweeds blowing through retailers' stores, shopping malls are pretty miserable places right now. This certainly seemed to be borne out by Liberty International, the UK's biggest shopping centre owner, yesterday.

Liberty said it had written down the value of its property assets by £1.08bn in the nine months to 30 September, which was responsible for a dreadful pre-tax loss of £1.06bn over the period.

It added to the gloom by revealing it had more than doubled last year's provision for retail tenant failures, which are expected to be higher than usual in the first three months of next year.

However, Liberty said that net rental income increased by 4 per cent to £281.3m over the nine-month period and that occupancy levels at its subsidiary CSC's UK regional shopping centres remained unchanged at 98.7 per cent. Indeed, Liberty is often regarded as one of the most defensive of the UK real estate investment trusts, but some analysts believe its shares are expensive compared with rivals, such as Hammerson. Add this to the fact that the retail sector could be in recession until 2010, Liberty may find the next 12 months tough. Sell.

Interserve

Our view: Hold

Share price: 230.25p (+20.25p)

Interserve, the services, maintenance and building group that published a third-quarter update yesterday, has seen its share price slump in recent months – after climbing to 518.5p in April, the stock fell to a low of 173.50p last week. It rose to 210p in advance of the update, which boosted the price to 230.25p. At current levels, it's trading at multiples of around 4.8 times estimated 2008 earnings, which, as analysts point out, is very low. So what's going on?

The UK order book remains strong at more than £6.1bn and, while the private sector reels under the pressure of recession, Interserve is focused on the public sector, which makes up two thirds of the group's workload.

Moreover, while the pension fund is in deficit – the shortfall was £110m at the interim stage – net debt, estimated to be £115m at the end of the year, is relatively low, and there is little refinancing risk (committed facilities of £250m expire in or after 2011). The triennial review of the pension will report back next year and Citigroup anticipates deficit recovery of £20m in 2010.

So, again, what's going on? Nervous investors make for a brutal market, and Interserve seems to have been caught up in a more general sell-off. The pension fund deficit has made things worse but while it is not alone in having a pension issue, it is better positioned than most. Its exposure to building and construction is defensive and its activities in the emerging economies of the Middle East, another cause of concern in this market, seem secure.

That said, market sentiment remains weak, and although that is not a reason to sell, it does temper our confidence in the shares in the short and medium term. Hold.

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