Babcock buys a gas handling business. Questor says buy.
Babcock was boosted by the news that it has bought the gas handling company LGE Process from Weir Group for £23m.
The FTSE 100 engineering group will combine Edinburgh-based LGE into the marine and technology business within its design services unit.
The acquisition of LGE, which designs and builds plants for the processing, storage and handling of liquid gases, enables Babcock to create a medium-sized, specialist energy and marine technology business with a wider offering.
The enlarged business will include the design and installation of mechanical, electrical and chemical processing equipment for ships, oil and gas platforms and onshore support facilities.
Peter Rogers, chief executive of Babcock, said the acquisition would allow the company “to build on its current positions and develop into new commercial marine markets, particularly within the oil and gas market”.
LGE reported revenues of £26.3m in the year to December 30 2011, and operating profits of £3m.
Babcock’s half-year results in November (Xetra: A0Z24E - news) were in line with City expectations and the company was feeling confident about its outlook on the back of a strong order book and bid pipeline.
The potential for organic growth in the second half of the financial year looks strong after a number of contract wins. The support services division stood out in the first half with 18pc growth in revenues, and it is likely to continue to be a strong performer for the group.
The pipeline for bids is also a reason for cheer, given it includes large contracts worth more than £100m and rebids of more than 10pc, suggesting the next 18 months could be fruitful as bids convert into orders and shares rise.
There are risks, with the defence sector still posing uncertainty at a time when budgets are shrinking, although there is evidence that momentum has been building in recent months. Babcock reported flat revenues in defence in the first half.
There is also some uncertainty about the outlook for its international division, where revenues fell 6pc in the first half. Babcock warned at the time of the results that slowdowns in Europe and the US could hit its equipment business as demand wanes for South Africa’s mineral resources.
However, a combination of strong organic growth potential, a strengthening balance sheet, strong order book and bid pipeline, and the potential from growth-generating acquisitions, make Babcock a buy.