Peter Rogers, chief executive of Babcock International, may have had a busy six months, but from a cursory glance at yesterday’s full-year results it might be tempting to conclude otherwise.

The order book of the £1.4 billion engineering services group has actually shrunk since its interim figures in November – from £3.3 billion to £3 billion.

That it has done so is through no lack of vigour on Mr Rogers’s part. Although the company’s attraction is that it draws about three quarters of its profits from providing long-term services to the Ministry of Defence, that exposure also makes its order book subject to political procrastination. In this case, the final go-ahead for £1.3 billion of work on the Royal School of Military Engineering, a £600 million contract for two new aircraft carriers and a £350 million maintenance contract for Britain’s submarine fleet are all imminent but not yet received.

However, that overhang should not detract from the strength of yesterday’s figures. Organic profit growth is running at 20 per cent, operating margins have risen from 6.9 per cent to 7.8 per cent and the dividend has been increased by 43 per cent to 11½p – matching the improvement in earnings per share.

In marine services – Babcock’s biggest division, accounting for 40 per cent of sales – the promised cost savings from last year’s Devonport acquisition have been achieved, while the recent £65 million purchase of Strachan & Henshaw (S&H), which has expertise in weapons launch systems for nuclear submarines, should help the company to pick up work in new territories, such as Spain and South Korea. That deal also furthers Babcock’s ambitions in nuclear decommissioning, in which S&H has long-term contracts with British Energy and the Atomic Weapons Establishment.

Babcock’s South African business, which integrates boilers into power stations, continues to benefit from South Africa’s spending spree on energy infrastructure amid continuing electricity blackouts. Those skills should also serve Babcock well if Zimbabwe is reopened to foreign investment. That leaves rail maintenance as the company’s weak spot, although management changes should mean that divisional operating margins recover to at least 4 per cent this year, from 0.2 per cent last year.

At 589½p, down 9p, Babcock offers secure, long-term profit growth on a multiple of 14 times current-year earnings – a discount to Serco, which it closely resembles. Buy.

TUI Travel

If ever there was an industry sector at risk from the soaring oil price, dwindling consumer confidence and a strong euro, then surely it is travel. Yet yesterday’s half-year numbers from Europe’s biggest tour operator suggest anything but. TUI Travel’s seasonal losses have been sharply reduced and British mainstream holiday sales for this summer – the most vulnerable segment in any downturn – are up 8 per cent.

Peter Long, the TUI chief executive, has been around the block a few times and reckons that summer holidays have become “sacrosanct”. So while consumers may be cutting back on new sofas and DIY, it will take a lot more than rampant inflation and a mortgage crisis to stop them spending a week lounging by the beach or hiking in the Andes.

But what about fuel and currency? Again, not an issue, Mr Long says – at least not for the time being. An aggressive hedging policy means that TUI is 65 per cent hedged on fuel and about 75 per cent hedged on currency. And when the euro hedge runs out, TUI will mitigate the impact on summer 2009 prices by renegotiating hotel prices. As for fuel, it accounts for less than 10 per cent of TUI’s costs, compared with about 30 per cent for airlines.

It is easy to be sceptical about how long the travel sector can continue to defy gravity, but the comfort for shareholders is that last year’s merger, bringing the Thomson and First Choice businesses under one roof, provides another two to three years of strong margin improvement and £150 million of targeted cost synergies. The shares, off 4¼p at 255p, are trading on 12 times current-year forecast – reasonable given the pace of earnings growth. The ride could get bumpy but hold.

Lookers

Psst! Fancy a new motor? Not, apparently, in Northern Ireland, where Lookers reported that new car sales were down 8 per cent in the first quarter. That is disappointing, given that the territory accounts for about a fifth of Lookers’ franchised sales and given that January and March tend to be its two biggest months. Because of the Province’s high level of public sector employment, it has also been Lookers’ most stable region. Now, falling property prices appear to have curbed consumers’ appetites for big-ticket spending. Not all was gloom. A debut contribution from Dutton Forshaw, the Mercedes-Benz and VW dealer bought for £55 million last year, should partly offset that weakness, as should the turnaround of Lookers’ used car supermarket. The greater strength lies in the company’s heavy exposure to franchised after-sales, from servicing to parts distribution, which provided more than half last year’s profits. Its counter-cyclicality should provide a useful cushion to further weakness in new car sales, as should Lookers’ used car operation, which was hit last year by discounting by manufacturers. With property valued at 103p a share, against yesterday’s 91½p, off 58 per cent since last May, Lookers looks cheap at seven times 2008 earnings and yielding 5 per cent (albeit with £120 million of debt). However, a poor near-term outlook for new cars counsels caution. Pass.

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