Investment Column: BBA slims down, but it's not growing

Roberto Quarta's 11 years at the helm of BBA have seen the group massively slimmed down. From a rag-bag of businesses ranging from industrial belting to carpet underlay, the conglomerate is now centred around two: aviation services and systems and non-woven fibres.

Roberto Quarta's 11 years at the helm of BBA have seen the group massively slimmed down. From a rag-bag of businesses ranging from industrial belting to carpet underlay, the conglomerate is now centred around two: aviation services and systems and non-woven fibres.

Unfortunately, as the record shows, the impact on the bottom line has been minimal.

Even stripping out amortisation and exceptional items, earnings per share of 19.7p last year were well below the 28.9p achieved in 1999. Certainly yesterday's half-time results showed an apparently healthy 10 per cent growth to 10.1p in the latest six months to June.

But that increase was all the result of last year's share buy-backs and a lower interest charge. Operating profit before amortisation and exceptionals was absolutely flat at £70.9m, with neither division showing any significant change from the comparable half year.

In mitigation, BBA pleads the impact of exchange rates and higher raw material costs. The cost of each at the operating level in the first half is put at £6m for the former and £3m for the latter, with a warning of more to come. Another £5m will be shaved from pre-tax profits if the current dollar-pound rate persists across the second half.

BBA undoubtedly has some reasonable businesses. Its non-woven fabrics lead the world in applications like hygiene wipes, surgeon's aprons and insulation for houses. Its Signature Flight Support operation dominates the market for servicing executive jets and their ilk. But it is less strong in areas like ground handling and aircraft hydraulics. The problem with companies like BBA is that exchange rate movements and changing raw material costs are not exceptional.

However you attempt to cut the cake, real growth is either cyclical or minimal.

All credit to the group therefore for its concentration on cash. Cash generation after interest, tax and capital investment has been something like £170m over the past two years, with £100m expected for 2004.

It tried and failed to bulk up its aero equipment side with the abortive acquisition of Dunlop Standard earlier this year. And it continues to make useful bolt-on additions to both divisions.

But shareholders may be better served by a resumption of the share buy-backs, which saw £40m invested last year, or perhaps, better still, a bit more generosity with the dividend.

The interim payment goes up 5 per cent to 3.35p, giving a running yield of 4.2 per cent, with the shares down 1.5p at 258.5p. Given a flat outlook for earnings, that is still not sufficient reason to buy the shares. Unattractive.