CSS Partners FTSE350 Market Report

Market Report

17 November 2008

Babcock International Group
BAB.L

Sector	Support services
Last closing price (17/11/2008) (p)	450.5
52 week High/Low (p)	650/306
Market Cap (£bn)	1.05
Sector weight age by Market Cap (%)	2.3
Average Volume (mn)	1.32
P/E ratio (TTM)	13.81
Industry P/E ration (TTM)	2.62

TTM: Trailing Twelve Month

Daily chart (BAB.L)

Business background and investment rationale

Babcock International works primarily with public sector institutions. The company provides outsourcing services to government and private sector customers and works extensively with the UK armed forces. The company is split into six divisions - including Defence, Engineering and Naval services – and has businesses across Europe, Africa and North America.

Strong order book

Babcock’s order book has increased by 55% compared with the first half of 2007/08 and is now at £5.2bn (30 September 2007: £3.3bn). In September, the group signed a 30-year contract worth £1.5bn to provide training and training support to the Royal School of Military Engineering (RSME), adding significant opportunities to extend its position in the military training market. In July Babcock won manufacturing contracts worth £675m to construct the bow sections and to carry out the assembly and completion of the ships at the dockyard in Rosyth. Babcock also added a C$250m (£125m) five-year contract with the Canadian government to provide in-service support for their Victoria class submarines, which represents its first opportunity to utilise submarine expertise in international markets. The company expects to win more contracts as the economic downturn worsens, particularly with governments looking to outsource more work to keep costs low.

Strong performance by marine and nuclear divisions

Babcock’s marine division, which represents just under half of the group, delivered a 45% increase in profits due to a full contribution from acquisitions and cost saving initiatives. Its nuclear division saw first-half profits rise 103% as it benefited from the integration of a recently purchased civil nuclear businesses. The group’s funding position is good and there are no refinancing requirements until 2012. At the end of September Babcock identified a further £10m of expected annual savings by 2011, in addition to the initial £4m announced at the time of the acquisition of DML in May 2007.

Technical outlook

On daily chart, Babcock raised nearly 50% on Fibonacci level from a low of 305p indicating sharp rebound and consolidation is needed near 450p level. MACD is negative but 12-day EMA has cross above 26-day EMA indicating a weak buy signal. 14-day RSI is above 50 and both RSI and MACD are making positive slope, and +DMI crossing above –DMI, indicating a positive trend forming. Stock has support between 417p-423.0p and resistance at 496p.

Trading strategy

The stock can be bought around 435.0p with a profit target 484.37p and stop loss of 413.53p (Hedge position: short position in spread betting with £2.87 bet per point).

Top

British American Tobacco PLC
BATS.L

Sector	Tobacco
Last closing price (10/11/2008) (p)	1703
52 week High/Low (p)	2060/1350
Market Cap (£bn)	33.85
Sector weight age by Market Cap (%)	67.45
Average Volume (mn)	8.6
P/E ratio (TTM)	14.46
Industry P/E ration (TTM)	0.76

TTM: Trailing Twelve Month

Daily chart (BATS.L)

Business background and investment rationale

British American Tobacco PLC is an international tobacco company engaged in the sale of cigarettes, cigars, leaf and other tobacco products. It has over 300 brands in its portfolio which are sold in more than 180 markets. BATS has four Global Drive Brands (GDB): Dunhill, Kent, Lucky Strike and Pall Mall.

Strong growth in emerging markets

For the third quarter, the group’s revenue increased by 19% to £8,704m as a result of favourable exchange rate movements, improved pricing, better product mix and the acquisitions of Tekel and Skandinavisk Tobakskompagni (ST) mid-year. Revenue would have increased by 9% at constant rates of exchange. Volume from subsidiaries was up 1% on an organic basis and by 4% to 524 billion cigarettes including Tekel and ST. In Asia-Pacific, profits rose by £104m to £602m, mainly attributable to strong performances in Pakistan, Vietnam, Bangladesh, Australia and Malaysia, and also benefiting from favourable exchange rates. At constant rates of exchange, profits would have grown by £65m or 13%. In Europe, profits were at £896 million, up from £246 million, as a result of the ST acquisition and excellent performances in Russia, Romania and Spain.

Significant acquisition in emerging market

In February 2008, BATS won the public tender for Tekel, the Turkish state owned Tobacco Company, with a bid of US$1,720m. The acquisition will raise the company’s share in the Turkish market, which is the eighth largest cigarette market in the world, to some 36% from just over 7%. The company also announced an agreement to acquire 100% of Skandinavisk Tobakskompagni’s (ST) cigarette and snus (moist powder tobacco) business. ST accounts for more than 60% of cigarette sales in Scandinavia, allowing BATS to strengthen its market positions in Denmark, Norway, Sweden and Poland, and achieve significant synergy benefits after acquisition.

Technical outlook

On daily chart, stock is consolidating between 1650.0p and 1750p with low volatility. MACD is negative but 12-day EMA has cross above 26-day EMA and cross above negative slope.14-day RSI is near 50 and trend is positive.14-day -DMI is above 14-day +DMI and falling, indicating positive trend is forming. Stock has good support between 1556.0p-1591 and strong resistance at 1768p and 1861.0p levels.

Trading strategy

The stock can be bought around 1650.0p with a profit target 1837.27p and stop loss of 1568.58p (Hedge position: Short position in spread betting with £0.757 bet per point).

Top | To unsubscribe please click here

Important Information

This report has been issued by CSS Partners LLP (“CSS Partners”). CSS Partners is an appointed representative of Charles Street Securities Europe LLP (“CSS”) which is authorised and regulated by the Financial Services Authority in the UK. It constitutes non-independent “investment research” as contemplated by the FSA Rules and is thus considered a marketing communication. This report was prepared by Kuldeep Bhati who is employed as an analyst at CSS Partners and as such does not conform with the FSA definition of independent investment research and as such is not subject to the rule of not dealing ahead of distribution of the marketing communication and was not prepared in line with the legal requirements for independent communication.

The report is provided solely for your information and may not be reproduced or redistributed, in whole or in part to any other person without specific consent of CSS Partners.

In the preparation of this report, CSS Partners has had access to publicly available information, and other sources believed to be reliable. Whilst reasonable care has been taken to ensure that the facts stated herein are accurate and that the recommendations, forecasts, opinions and expectations contained herein are fair and reasonable, neither the author, nor CSS Partners, nor CSS has verified the public information upon which this is based. None of the author, CSS Partners, CSS or any of their respective directors, officers or employees (the “Parties”) makes any representation or warranty, express or implied as to soundness of the recommendation, the accuracy or completeness of the information or opinions contained herein. Investors must make their own investment decision and not rely on this report. The Parties shall not be liable for any loss, costs, liability, expenses (together “losses”) suffered by you following your utilising any of the services we provide other than losses arising directly as a result of fraud or wilful default on our part or as a result of any liability that may not be excluded under the UK regulatory system. In no event shall we be liable for special, indirect or consequential damages of any kind, even though we may have been informed about the possibility of such loss. You shall indemnify us and our officers and employees on demand and keep all such persons indemnified against all losses which may be incurred directly or indirectly by reason of or in consequence of providing this service save to the extent that such losses arise directly as a result of our, fraud or wilful default.

Any opinions, forecasts or estimates herein constitute a judgment as at the date of this report. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or estimates. This information is subject to change without notice. It may be incomplete or condensed and it may not contain all material information concerning the Company. This document does not constitute or form part of and should not be construed as any offer for sale or purchase of (or solicitation of or invitation to make any offer to buy or sell) any securities nor shall it or any part of it form the basis of or be relied on in connection with any contract or commitment whatsoever.

Risk Factors

There is no certainty that the recommendations will be successful or that they will make money for investors.

There is no certainty that execution prices can be achieved, either in opening or in closing a position.

There is considerable risk operating in equity, futures, options and spread betting markets and investors need to be able to sustain a total loss of capital along with unlimited liability. Potential investors are recommended to consult a financial adviser before entering into such positions.

Regulatory disclosures

In accordance with the Conduct of Business Rules COBS12.4.7R (i) in the preparation of the report the analyst used price and volume charts provided by independent data suppliers and applied technical analysis tools of investment and trading evaluation in arriving at his recommendations, ii) all recommendations made by the analyst are followed up in subsequent reports until the closure of a position, iii) there is no certainty that any recommendation will be successful or that technical analysis should be used exclusively to arrive at investment decisions.

In accordance with section 12.4 of the FSA’s New Conduct of Business Rules, CSS Partners makes the following disclosures:

CSS, CSS Partners and their respective officers, directors, shareholders and /or partners may have a shareholding in the companies reviewed in this report. They will not have access to this report until it is published, except those responsible for compliance issues concerning this report.
The research analyst responsible for the content of this research report certifies that: (1) the views expressed and attributed to the research analyst or analysis in the research report accurately reflect his personal assessment about the subject securities and issuers and/or other subject matter as a appropriate; and (2) no part of his compensation was, is or will be, directly or indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts.
The analyst is not involved in any other activity of CSS Partners or CSS that is inconsistent with his objectivity in preparing the reports. His research information is confidential, the only persons privy to this data bar the analyst are the senior management. • The research recommendations will be updated, but neither CSS nor CSS Partners accept any responsibility for any delay or interruption of service in the submission of reports or updates to reports.
Distribution of recommendations for the period 1 July to 30 September 2008:

% Distribution of recommendations No of recommendation

Buy 60.8% 17

Hold 0 0

Sell 39.2% 11

The first column displays the % distribution of recommendations made by CSS Partners in this Technical Analysis Trading programme and the second column shows the numbers of such recommendation. Neither CSS nor CSS Partners has any investment banking relationships with any of the companies covered in the Technical Analysis Trading Programme, namely the companies in the FTSE 350 index.

Your attention is also directed to the terms of our client agreement with you that covers the provision of this service. To the extent that there is any conflict between the above and the client agreement, the provisions of the above disclaimer will take priority

	% Distribution of recommendations	No of recommendation
Buy	60.8%	17
Hold	0	0
Sell	39.2%	11