Andy Brough's Midas tips: Babcock

By THIS IS MONEY
Updated: 00:00 EST, 26 April 2009

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Each week Andy Brough, top fund manager and occasional Midas contributor, beefs up Financial Mail's online coverage with extra share tips. This week he explains his passion for engineering firm Babcock...

Anyone who has been operating in this market for the past 18 months will have an idea of the meaning behind the Chinese curse: May you live in interesting times.

At moments like this I like to try and make my life a bit less interesting by looking for companies with strong order books to help them cope with volatile times.

Babcock is a share which I have held for more than seven years as it has transformed itself from a rag bag of engineering interests into a leading support services company. It currently has an order book worth £5.5bn which compares favourably with this year's estimated turnover of approximately £2.2bn.

In addition, because a lot of this turnover is on long term contracts, the earnings of Babcock are largely recurrent. The company has an effective monopoly in submarine repairs and maintenance following the acquisition of Davenport. They have used this expertise to start to win contracts overseas which should provide another avenue of growth.

As the largest facilities management support provider to the Ministry of Defence and the biggest support provider to the Royal Navy there will be concerns about what may happen when the current Government tries to get the budget under control.

The big advantage for Babcock is that it is not involved in the large scale programs which have a habit of not only being late but also way over budget.

Babcock is involved in outsourcing and repairs and maintenance. It aims to save Government's money by bringing the efficiency of the private sector to the public sector and its success is reflected in the steady stream of new contract wins.

The company does have some areas which aren't doing as well. Rail spending and the relationship with National Rail has affected the profitability of this division.

Engineering and plant business is also seeing a slow down although South Africa and its demand for power investment is one bright spot in this division. The acquisitions have been made with a mixture of debt and equity.

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The company is very cash generative and could pay off the debt over six years. Another concern is the large pension fund which although currently in surplus is subject to the movements in the market.

It is likely that some form of insurance will be taken out to protect the company from any unexpected increases in liabilities on the pension scheme and such a move would be very welcomed by the market.

The stock is currently on a P/E ratio of 10 times to March 2010 and is expected to achieve double digit growth going forward. Over the last six months I have been adding to my holding below 400p and selling a few when they have got above 450p.

- Plot a range of Babcock share charts