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The Investment Column: Cobham looks over-rated

Shareholders in acquisitive engineering company Cobham have had a good run for their money. With the exception of a slight hiccup in late 1996, when a downturn in the fortunes of its electronics subsidiary Westwind prompted a profits warning, Cobham has gone from strength to strength.

The group's share price has soared recently, rising from 550p in April to 847.5p, up 1p yesterday, as the group posted a 20 per cent rise in half-year profits to June at pounds 25m, beating expectations. The market was also cheered by news of Cobham's strong order book and a string of niche buys.

The year ahead for Cobham looks pretty solid. Its FR Aviation arm, which sells aircraft components, is currently refurbishing 21 Nimrod planes and looks set for more orders from the Ministry of Defence.

Demand is growing for its traditional flight refuelling services, including more business with the Singapore Air Force, and Chelton, which supplies radio antennae, looks set to benefit from the recent acquisition spree. Even problem child Westwind should have a good year, with a variety of innovations like low-cost scanners in the pipeline.

Cobham plans to splash some cash in the months to come. The group is budgeting for pounds 15m-pounds 20m of capital expenditure in the second half, most of which is earmarked for infrastructure improvements. Neither is the company ruling out further acquisitions. Gearing is expected to jump from 6.6 per cent to 40-5 per cent.

The real problem with Cobham is not its growth prospects or even its increased gearing level. The company is simply over-rated. Forecasts put it on a prospective p/e of more than 22, too high for a business predicted to grow profits by 19 per cent this year. Now may be the time for shareholders to sell out.