Peter Rogers, chief executive of Babcock International, clearly thinks that his company’s shares are too cheap – he bought £103,000 worth yesterday - and the stock market seems to agree.

Babcock’s shares rallied by nearly 4 per cent after the release of first-half results, which showed that the engineering services group, whose value had fallen by a third since September, continues to perform to plan. Operating profits were up 32 per cent, better than expected, or 10 per cent on an underlying basis; cash-generation was even better, in that Babcock threw off one third more cash than it booked in profits, and the interim dividend was raised by 21 per cent. Further, the slew of Ministry of Defence work that had been anticipated at May’s full-year results has come through, such that Babcock’s order book has surged from £3 billion to £5.2 billion, or more than three times last year’s sales. The company is also confident of signing an additional £1 billion of work in the second half of its financial year, including the contract to assemble the Jackal, the Army patrol vehicle that will replace Land Rovers in Afghanistan, the refitting of HMS Vigilant, the Trident submarine, and the running of the Devonport naval base.

As such deals demonstrate, Babcock’s attraction is its skew to areas of what might be deemed nondiscretionary spending, whether military or otherwise. Not maintaining a nuclear submarine is not an option; neither is not looking after a warships’s weapon systems, not checking track on the rail network or neglecting the running of a civil nuclear installation – Babock works at Sellafield, Dounreay and Aldermaston.

An additional comfort is that work on the Royal Navy’s next-generation aircraft carrier, where there had been fears of postponement, is now under way. Indeed, noises from the Government that it intends to pull forward slugs of public spending on infrastructural projects should work in Babcock’s favour.

Areas of weakness remain. Babcock’s rail business made an above-forecast first-half loss, although the company’s decision to withdraw from the civil engineering aspects of rail maintenance might mark the turn. In South Africa, where it distributes construction equipment, Babcock has been hurt by a depreciating rand. Elsewhere, net debt of £373 million is unhelpful to investor sentiment. Yet at 418¼p, or ten times 2009 earnings, Babcock is good value for a company that can see so far ahead. Follow the boss and buy on weakness.

Playtech

Playtech, the online gaming software developer and the biggest constituent of AIM, is not the easiest company to comprehend. Having been founded in Israel, it is incorporated in the British Virgin Islands, headquartered in the Isle of Man, does the bulk of its software development in Estonia, has a share price in sterling and reports its figures in US dollars.

Until yesterday, that is, when Playtech added further complexity by switching its reporting currency to euros. That change is perhaps long overdue given that, since America’s online gaming crackdown two years ago, it has drawn no business from the United States and now derives three quarters of its sales from the eurozone. However, taken together with its use of a single spot rate to convert its numbers (rather than an annual average) and recent currency volatility, yesterday’s third-quarter figures are difficult to decipher. Quarter-on-quarter revenues were up by 6 per cent in euros, but flat in dollar terms. The comfort must be that trading remains strong – up 10.6 per cent year-on-year in October – while Playtech has signed four new licensees, from whom it takes a cut of gaming revenue.

However, there are grounds for caution. First, that Playtech uses cash that it has raised in the public markets to buy private companies from Teddy Sagi, its founder and biggest shareholder, who retains 41 per cent. More such transactions are planned before Playtech’s promised move to the main market.

Secondly, there is the risk that Toscafund, the underpressure hedge fund that is Playtech’s second-biggest shareholder, with 12 per cent, may have to sell. On the ground that Tempus should invest only in what it understands, Playtech’s shares – at 365p, or seven times 2009 earnings – are best left on the shelf.

Penna Consulting

Penna Consulting is categorised as a recruitment agency, but its share price, up 62 per cent year-on-year, suggests otherwise. Only on learning that 60 per cent of Penna’s fee income is derived from “career transition services” – human resources jargon for helping sacked workers to find new jobs – does that outperformance make sense.

In broad terms, this AIM-listed company thrives on upheaval in the workplace and of that there promises to be plenty. Penna has latterly benefited from private equity restructurings – yesterday’s first-half numbers were helped by Guy Hands’s axe-swinging at EMI – but it is increasingly feeling the force of economic downturn.

Usefully, Penna draws one fifth of its revenues from financial services and works for all four big high street banks. Retail and professional services are also sizeable. Conversely, a quarter of its business is in the public sector, where it is involved in relocating government agencies to the regions, which also entails hiring at the new offices.

If there is a worry, it must be whether it can cope. Through a network of 400 freelance associates, it claims that it has the capacity to double revenues with no impact on fixed costs. The other concern is the shares’ illiquidity – the chairman alone holds 34 per cent.

Penna has net cash and is the biggest British player in a niche that should grow by at least 20 per cent a year for the foreseeable future. At 157½p, or 13 times 2009 earnings, its contra-cyclical rally has farther to run.

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