Bottom Line: Big payout puts BAe fans on cloud nine

EFFORTS to put British Aerospace back on to an even financial keel in the past year have run some way ahead of a genuine improvement in trading in its core businesses, with the notable exception of Rover and Airbus which cruised into a small profit during the second half of 1993.

A 9p rise in BAe's ever-ascending share price to 549p owed almost everything to a generous 25 per cent rise in the final dividend rather than a triumphant return to operating profits of pounds 200m.

This was achieved on a turnover of pounds 10.1bn in its continuing operations.

The profit, meagre by any standards, was a shade below forecasts after BAe had applied the odd kitchen sink, in particular pounds 40m worth of stock write-downs in commercial aircraft.

Thanks to the premature arrival of some chunky advance payments before the end of December, BAe generated an operating cash inflow of pounds 326m, reducing net debt to a mere pounds 165m.

This was not the good news it sounds because BAe's current borrowing limits are tied to gross borrowings which are well over pounds 1bn.

After taking account of 1993's pounds 214m net loss, before pounds 52m of dividends, and the book loss on Rover, net worth has fallen from pounds 2.7bn to about pounds 1bn since June 1992. So BAe is seeking to change its limits from 150 per cent to 250 per cent of net worth and to alter the numerator from gross to net debt into the bargain.

On this basis BAe will have a spectacularly high net borrowing limit of pounds 2.5bn just when it is due to receive a fat pounds 800m cheque for Rover and shrug off pounds 1.7bn of overall obligations.

Why so high? No wonder some are suspecting that the net worth denominator could be in line to shrink yet again and are looking no further than the ailing commercial aircraft operations, and turbo-props in particular.

True enough that losses in commercial aircraft fell from pounds 337m to pounds 162m after bearing a pounds 40m stock write-down and pounds 26m rationalisation costs. But the improvement was largely due to loss elimination following the sale of corporate jets last year.

With the costs of re-engineering BAe's ATP into the Jetstream 61 running at pounds 30m a year, it seems likely that losses in the division will run at pounds 130m or so for a year or two.

In any future joint ventures further balance sheet hits cannot be ruled out - only their scale is uncertain.

Defence profits slipped last year and are set to drift down this year and in 1995 until Al Yamamah 2 with its 24 Tornadoes kicks in to profits.

Pre-tax profits of pounds 180m this year, before Rover and other exceptionals, imply a price/earnings of 16, and a 10.5p dividend a yield of 2.5 per cent. A staunching of turbo-prop losses and a strong revival in defence three years hence could make this rating look cheap.

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