The Investment column: Babcock
Friday 18 June 1999
Sorting out the one-time boilermaker-to-dockyard management group defeated the combined might of City legends such as Lord King, Jeff Whalley and Tony Gartland. When Dr Parker took the helm in 1993, Babcock was a confused mish-mash of seven separate divisions. The share price was volatile as most of its turnover came from high-risk contracts with power stations and construction companies.
Now Babcock has become a lean machine with just two divisions - engineering services and materials handling. It is winning low-risk, higher margin contracts such as refitting the Ark Royal and the navy's submarines.
The company made a breakthrough by buying Rosyth naval shipyard, a risky punt on the yard's ability to benefit from the Government's strategic defence review. Babcock's bet paid off and Rosyth now has guaranteed refitting orders until 2007.
The disposal of a 50 per cent stake in a water treatment venture has reduced turnover, but profits still leapt last year to pounds 25.3m, 10 per cent ahead of forecasts. Earnings per share doubled to 11.44p from 5.93p.
Prospects are good. Babcock is in consortiums bidding for forthcoming weapons and decontamination contracts. The shares tipped up just 2p to 121p yesterday, giving Babcock a forward p/e of 11. That's higher than its peers, but it undervalues the turnaround. Buy.
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