The Investment Column: Little friction as BBA has the right technology

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The Independent Online
BRAKEPADS and nappies are unlikely bedfellows in any trading portfolio, but BBA, the engineer, has been applying leading-edge technology to both.

Unlike other metalbashers, BBA is exposed to the manufacture of a variety of consumer products, and the performance of its shares is equally odd for an engineering company. The group claims its 6 per cent growth rate in sales, unveiled in yesterday's interims, is sustainable. There seems little reason to doubt it.

BBA is naturally coy about the financials of the main driver of its business - the nonwovens division - which makes feminine hygiene products and incontinence pads using pioneering non-textile materials. Analysts estimate its margins to be about 18 per cent, compared to 13 per cent in the friction division - brake pads, if you prefer - and aviation. BBA sees scope to grow its sales by 10 per cent by making strategic bolt-on acquisitions that further enhance the technology base.

Meanwhile the aviation division, which maintains small aircraft, is to benefit from the increasing popularity of corporate jets. Indeed, Warren Buffett invests in one of BBA's customers. That market is growing by 6 per cent although, as engine overhaul revenues lag behind engine sales, only half of that benefits BBA. That's no problem, however; BBA has just 1 per cent of the global market, so there's much to play for.

The friction business is set to boom as cars sold over the past four years come in for new brakepads. The upside is impressive - the after- sales market representing 70 per cent of the division's business - and BBA expects to double its US market share to 10 per cent by the end of next year.

The group's targeted pounds 135m capex spend this year should not concern investors, given the that BBA's only constraint on meeting demand for its nonwoven products is capacity.

No surprises then that BBA shares have been re-rated following the sector's hammering last year. Analysts expect full year pre-tax profits of pounds 189m and earnings of 29.1p per share, rising to pounds 220m and 34p. Despite climbing back from 285.5p the shares, at 520p, are on a forward price-earnings ratio of 15.

For a company with a consistent record, visible earnings growth and proprietary technology, that's still good value.