Shares in Babcock International have a habit of surging on the release of half-yearly results and yesterday proved no different.

Having rallied nearly 10 per cent at last November’s interims and 11 per cent at May’s full-year numbers – which were accompanied by the £350 million acquisition of Devonport - yesterday’s 8 per cent gain in the stock of the FTSE 250 engineering services group was much of a piece.

A 42 per cent rise in pretax profits to £43.6 million comfortably beat consensus forecasts, as did a 38 per cent rise in earnings per share. The interim dividend was increased in line.

Not all the virtues of yesterday’s numbers are easy to repeat. A 192 per cent rise in operating profits from Babcock’s marine services division – now by far its largest after the Devonport deal – was helped by the timing of the completion of a seven-year contract, now renewed, with the Ministry of Defence (MoD) at Faslane. Elsewhere, its private-yacht business, which makes £100 million luxury vessels for the likes of the Aga Khan, benefited from large contracts in the first half.

Babcock’s shares also drew momentum from a change in tax guidance that helped to send profit forecasts modestly higher. The company now expects to pay tax at a rate of 19 per cent over the next two years, against previous expectations of 22 per cent.

Nor were the numbers flawless. They were marred by a poor performance from its rail division, which recorded a £2.7 million operating loss on revenues of £98.6 million. Although Babcock hung on to its role as a contractor to Network Rail in a review that saw their number reduced from six to four, it also appears to have lost control of costs during that period. Babcock reassured yesterday that that problem had been addressed, and was confident that rail would return to profit in the second half.

But what continues to enthuse is that Babcock consistently delivers strong organic growth, which reached 14 per cent in the first half. With the exception of rail, Babcock is growing strongly across the board, with its engineering and plant services division helped by heavy investment in power infrastructure in South Africa and defence services bolstered by additional work from the MoD.

With all of the savings from Devonport yet to feed through and earnings growing at 17 per cent, the shares, at 15 times next year’s earnings, are worth holding at 617½p.

Northern Foods

November has rarely proved a good time to buy Northern Foods. The maker of Goodfella’s pizza and Fox’s biscuits has given warning on profits from the Christmas-period trading in four of the past five years.

On the evidence of first-half figures yesterday, there are reasons to believe that 2007 could prove different. First, after the disposal of its seasonally sensitive chilled-pastry and cakes businesses, Northern is less dependent on Christmas than it once was. November has replaced December as its biggest sales month.

Secondly, Stefan Barden, the new chief executive of Northern, appears to have succeeded where his predecessors have failed in passing on price rises to customers during strong commodity price inflation. The company confirmed yesterday that it had been able to recover all £40 million of the hit that it had faced from higher wheat, dairy and cocoa prices – a figure equivalent to last year’s pretax profits – against two thirds a month ago. Coupled with a 0.2 percentage-point rise in margins to 6.1 per cent, the upshot was that some analysts nudged their profit forecasts modestly higher – an unheard-of phenomenon for Northern at this time of year.

Shareholders seeking other signs of confidence found them in Mr Barden’s admission that the company was seeking bolt-on acquisitions – something it has not done in seven years.

A still-sceptical City is likely to wait until after Christmas before giving him the benefit of the doubt. But the potential to raise margins in chilled foods and biscuits towards those of its peers, a current-year earnings multiple of 13 times and a 4.4 per cent dividend yield make the shares a “buy” for the brave.

Great Portland

Ayear ago, overseas investors spoke for 18 per cent of the share register of Great Portland Estates (GPE), the FTSE 250 West End office developer. Today, that figure is 48 per cent.

What these arrivistes – which include Cohen & Steers, the US real estate investment trust (Reit) investor, Sumitomo Trust & Banking, of Japan, and the Government of Singapore – have in common is the belief that specialist Reits are better placed to outperform their generalist peers. Half-year figures from GPE, newly converted into a Reit, went some way yesterday to justify that stance.

Whereas valuers have marked the values of commercial property portfolios down by between 3 per cent and 5 per cent over the past few months, GPE’s £1.4 billion of like-for-like assets (those held for a year or more) have been marked up by 7.9 per cent Redeveloping for higher rent deals pushed GPE’s net asset value (NAV) up by 11 per cent to 660p. There should be more value yet to come, through: 80 per cent of its properties are let on rental deals struck at a 40 per cent discount to present market rates. These will be relet over the next six years, which, together with refurbishment, should make for further rent improvements.

At 535p the shares trade at a 19 per cent discount to NAV. That is a premium to Land Securities’ 29 per cent discount to NAV and British Land’s 54 per cent discount, but specialist Reits such as GPE should continue to outperform. Hold on.

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