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BBA
The BBA group has two main businesses which make something of an odd combination. The first, BBA Aviation Services provides refuelling, cargo handling, maintenance, ground handling and other services to the business and commercial aviation markets. It also overhauls jet engines and supplies engine parts. BBA Aviation Systems designs, manufactures and overhauls landing gear, aircraft hydraulics and other aircraft equipment. It also runs one of the leading pilot training schools in Europe.
BBA Materials Technology develops and manufactures non-woven materials, engineered fabrics, which are used extensively in the hygiene and medical markets and in a great many industrial applications. BBA Group also manufactures friction materials for train brakes.
As anticipated, BBA reported a weaker second half results. Underlying profits (continuing operations before goodwill amortisation and all exceptional items) were £128.1m, down from £130.5m last year. Turnover grew by 3.3% for the year to reach £1,375m. BBA’s first half saw organic growth of 8%. The strong pound is partly to blame for the poor performance, in constant currency terms BBA says sales grew by 12%.
Increasing raw material costs and the weakness of the US dollar have affected the materials technology business. The cost increases have been partly offset by price increases and a cost reduction programme. The net impact of the cost increases is around £8m for the year and operating margins have shrunk from 12.5% to 10.4%.
Business Aviation sales increased by 21%, on a constant currency basis, to £255m. Organic growth, excluding the impact of acquisitions and increased fuel prices, was 8% with most of this coming from the continued expansion of the fractional operators. The company has expanded its network from 5 to 19 locations in Europe (total locations now stand at 67). BBA acquired an FBO (fixed base operator-a business situated at an airport) at New Orleans for £3.2m with annual turnover of around £2m and followed this in January 2005 with another acquisition at Heathrow.
In Engine Repair and Overhaul sales grew by 4% (at constant currency) to £290m. BBA has been awarded a 5 year contract worth US$7m per annum from the U.S. army to overhaul aviation ground power units. In January 2005 BBA was awarded another 5 year contract, worth $4m per annum from the U.S. Air Force contract to provide engine maintenance for the C21 (Learjet) fleet.
At ASIG, the commercial aviation services provider, sales grew by 6% on a constant currency basis to £164m. The acquisition of AGI (the US based Ground Handler) during the second half of the year added 7 new airport locations in the USA and strengthened BBA’s market position in another 8 locations. ASIG’s worldwide network now amounts to 71 locations of which 46 are in the top 100 airports. The acquisition of Boker Aeroclean, an aircraft cleaning company at Heathrow, provides another service at an existing location. The joint venture at Bangkok’s new international airport is on track to commence operations in the fourth quarter of 2005.
The closure of the Millville engine repair plant in America is expoected to produce US$8m in annual savings next year.
High oil prices will dampen the outlook for the aviation industry while the materials technology business is suffering from increases in costs. The strength of sterling has eaten away the respectable operating performance leaving weak reported results. BBA seems to be looking to acquisitions and rationalisations to drive growth, which probably indicates limitations to organic growth. At 300p the prospective PE of 13.9x is in line with the sector. The yield is 3.9%.
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