The Investment column: Cobham ready for take-off

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The Independent Online
COBHAM'S chief executive, Gordon Page, hesitates to say that Cobham will enjoy a surge in orders as Nato assesses the lessons of the Kosovo war.

He is, however, certain what the lessons were, and that Cobham is placed to benefit. There were breakdowns in communication between the troops of different Nato countries, and the mid-air refuelling arrangements could have been better.

Cobham's business is 85 per cent aerospace, and it is a leader in antennae and the refuelling systems that allow several aircraft to fill up at the same time in flight. But there are no orders yet.

That's no problem, however; elsewhere in Cobham's business there is almost- guaranteed and sizeable earnings growth potential. It is expecting to receive orders, each worth pounds 500,000, to fit out perhaps as many as 600 Eurofighters, and is in the last stages of negotiating prices for the supply of 20,000 missile cooling systems.

Beyond the millennium, the group is braced to supply either or both Boeing and Lockheed, which are contracted to develop a new superfighter. The jet is to replace both Harriers and the F14s flown by the US Navy's "top guns". Orders could top 6,000 because, at $38m (pounds 24m) each, the aircraft is a relative snip. Cobham is in the third year of an investment programme to satisfy the order book, and it is investing pounds 30m in capital expenditure this year.

For the time being, the flight services division generates earnings stability through flight training contracts with the Ministry of Defence, which typically last for 10 years. On the downside, the European civil consortium Airbus is a less reliable customer and pushes down prices annually. To offset this Cobham aims to strengthen its relationship with Boeing. The Westwind electronics business is still troubled, but showing signs of recovery.

The shares fell 5 per cent yesterday as the group posted interim figures bang in line with most forecasts, but missed the top of the range. That seems harsh given the excitement of the forward order book, which should deliver near 15 per cent annual earnings growth.

Dresdner Kleinwort Benson expects pre-tax profits of pounds 72m and earnings of 50.3p this year, giving Cobham a forward p/e of 18. The shares are well above their October low point of 565p, but they still represent good value. Buy.

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