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Cobham sees commercial sector as best form of defense

By Brenda Goh

LONDON (Reuters) - British defense and aerospace supplier Cobham is to expand its commercial aircraft division and continue cost-cutting to offset forecast U.S. budget cutbacks and return the company to growth next year.

Cobham, which makes communications equipment for military vehicles and aircraft, said on Thursday that it intends to make more acquisitions in the commercial sector, which it expects to outperform defense and security in the near to medium term.

"We will be moving in that direction," Chief Executive Bob Murphy told reporters when asked if Cobham's commercial arm could grow to account for half of the company's revenue, from 34 percent now.

"We want to get more balance in time, and we feel that we're underweight there versus our exposure to defense," Murphy said, adding that the company could take on 800 million pounds ($1.2 billion) of debt to buy businesses in the commercial sector.

Cobham embarked on a cost-cutting drive in 2010 to combat weakening demand from the defense sector as the United States and debt-laden European governments reduced defense spending by billions of dollars. Cobham's measures have so far saved a total of 48 million pounds ($72.3 million).

The company bought Danish communications equipment maker Thrane & Thrane in June for 275 million pounds as part of its shift to the commercial sector. Growth in Cobham's U.S. defense arm, which contributes 40 percent of its revenue, contracted 4 percent last year while its commercial unit grew by 2 percent

Cobham posted a better than expected 8 percent fall in 2012 pretax profit on Thursday, led by restructuring costs and a fall in sales to the United States. Thomson Reuters I/B/E/S data showed a consensus analysts' forecast of a 21 percent fall.

Group revenue fell 6 percent to 1.75 billion pounds, while order intake shrank by 19 percent.

ROBUST DIVIDEND

Cobham continued its policy of paying a robust dividend, lifting it by 10 percent to 8.8 pence, but said that it is not considering returning cash to shareholders through a share buyback.

"We continue to expect group organic revenues to decline by low to mid-single digits in the current year before returning to modest growth in 2014 and then mid-single-digit growth thereafter," Murphy said, describing the U.S. outlook as highly uncertain.

RBC Capital Markets analyst Robert Stallard described the results as respectable, but he added: "We think the forecast for organic growth from 2014 onwards could prove optimistic, especially if there are further cuts to UK defense spending."

Defense contractors including BAE Systems , Northrop Grumman and General Dynamics Corp have been hit by order cutbacks and contract delays as U.S. politicians have fought over the country's budget. They have in recent weeks warned that the tough U.S. outlook could hit 2013 sales and earnings.

About $85 billion in automatic across-the-board U.S. government spending cuts for the 2013 financial year, also known as "sequestration", started to take effect on March 1 after President Barack Obama and Congress failed to agree an alternative budget deal.

The cuts add to earlier plans made by the United States to cut $487 billion from its defense budget over the next decade. Britain's government pledged in 2010 to reduce its defense spending by 8 percent by 2014.

Shares in Cobham trade at a price-to-earnings multiple of 10, against 11 and 13 respectively for rivals Qinetiq and Meggitt .

Cobham shares were up 3.75 percent to 237.8 pence at 6.33 a.m. ET, valuing the company at 2.49 billion pounds. ($1 = 0.6643 British pounds)

(Editing by David Goodman)

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