Bottom Line: Crucible provisions touch a nerve

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The Independent Online
JUDGING by the reaction to respectable-looking results from Morgan Crucible yesterday, the Accounting Standards Board's bid to outlaw the use of pre-acquisition provisions is hitting its targets.

The profit and loss account looked better the further down it went. A 7 per cent rise in operating profits to pounds 70.7m was enhanced by an pounds 8m fall in losses and provisions for business closures, leaving taxable profits 27 per cent ahead at pounds 61.3m. A fall in the tax charge from 37.8 to 29.5 per cent meant earnings increased by 38 per cent to 18.7p a share.

The dividend was held at 12.6p, pushing cover up from 1.1 times to a more respectable 1.5. As icing on the cake, Bruce Farmer, managing director, reports increases of up to 10 per cent in orders in the three months to February.

Despite this, the shares fell 38p to 289p as investors focused on the small print. This showed that the group had used pounds 17.6m of provisions in arriving at pre-tax profit, up from pounds 15.2m the previous year. It established a further pounds 18.6m of provisions, of which pounds 10.3m were on the nine acquisitions made in 1992 - which cost just pounds 6.6m more than that, and made a combined contribution to operating profit of pounds 1.8m. More controversially, it returned to purchases made in the previous year to establish a further pounds 8.3m of provisions.

Morgan Crucible has doubtless made good use of these provisions in slashing costs and improving production facilities - 400 jobs went last year and a similar number will be shed in the first half of 1993. But there is little doubt they also make profit performance look better. The City is also worried about how Morgan Crucible will look in 18 months, when the ban on pre-acquisition provisions is likely to take effect.

If the balance sheet is anything to go by, there is some cause for concern. Last year was the first time since 1988 that shareholders were not asked to stump up cash, and debt more than doubled from pounds 67.9m to pounds 158.2m, or 67 per cent of shareholders' funds.

The self-imposed two-year moratorium on a rights issue has now expired, but Dr Farmer says there is no plan to launch one 'unless something magnificent comes up'. Shareholders will remain wary as long as gearing stays close to his 70 per cent ceiling.

Analysts are forecasting pounds 69m profit in the current year, putting the shares on a market average multiple of about 14.5 times prospective earnings. The yield, on a dividend increased to 13p, looks attractive at 5.4 per cent. But that is needed to compensate for the risks.