Blue Chip: No silver lining at Vickers

ALTHOUGH the ballyhoo surrounding the sale of car maker Rolls- Royce is to be expected for one of the world's leading luxury brands, its profitability has been erratic. And Vickers has had plenty of problems running the business - chiefly a lack of economies of scale in what is ultimately a very small market.

Rolls-Royce has not been the only problem Vickers has had to contend with, and the shares have badly underperformed the market since 1991, despite something of a renaissance for many engineers over the same period.

But with interest hotting up for the car maker, a minimum of pounds 300m from a disposal looks feasible. If the bidding is intense enough, that could rise to pounds 400 or more. And the company is exiting the business at the right time: Rolls-Royce Motors could show a loss for the first half of this year. Costs for the launch of the new Rolls-Royce, the Silver Seraph, and the run-down of the previous model won't help.

Vickers has promised to distribute the proceeds to shareholders, in part through a share buy back, and partly through acquisitions. A buy- back should boost earnings per share, and if an acquisition shows a decent rate of return, that will also boost profits. Coupled with that is the prospect that the group could increase borrowings - by up to pounds 400m - and beef up its war chest.

Elsewhere in the group, the Cosworth automotive engineering business is going through a tough time - profits for Cosworth and Riva fell to pounds 6.5m in 1997 from pounds 10.2m in 1996, and could well fall further.

In defence, seemingly good profits of pounds 21.9m were flattered by deferred profits written back, worth pounds 8m to pounds 12m, an item which is likely to fall sharply this year. The one star performer has been civil aerospace, but that could be reaching the top of the cycle.

While the shares have had a decent run in the last few weeks, they leave nothing to chance. It is too early at the moment to forecast much of a renaissance for Vickers.

Investors are best advised to keep a close eye on proceedings from the sidelines. The shares are a hold at best.

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