Bottom Line: GEC love/hate relationship continues

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The Independent Online
AN 8 per cent plunge in GEC's share price is scarcely a polite response to the news that Lord Weinstock, who turns 70 in three weeks, plans to remain at the helm as managing director for the next two years.

The market reaction owes much to expectations for the 1993/4 figures, which had run well ahead of reality despite the company's plain warning last December that profits would show little improvement.

In the event, pre-tax profits rose pounds 3m to pounds 866m, true to GEC's prognostication, and over-optimistic forecasts for the current year have had to be reined back.

Nothing could better illustrate the City's love-hate relationship with GEC. The City is critical of its pedestrian earnings performance but admires the group's resilience in the recession.

The prudent accounting that lies behind this explains the company's amazing cash-generative abilities even without the benefit of a pounds 400m-plus up-front payment from PowerGen for Connor's Quay.

Many are uncomfortable with a perennial cash mountain, now topping pounds 2.8bn, but the same people may not be happy to see this spent in large gobbets. Lord Weinstock's continued grasp on the reins of power upsets some notions of corporate governance, but would they really prefer the uncertainty of an untried successor?

On that score, the appointment to the GEC board of three managing directors from GEC-Alsthom, GEC-Marconi and GPT should allow a suitable heir- apparent to emerge and become familiar to investors over the next two years.

In the meantime, GEC is in transition with a reasonably well- functioning core in power, electronics systems and telecoms, while seeking to shed poorly performing, and arguably neglected, businesses.

The process will be slower than some would like. Credit Lyonnais expects no more than pounds 930m pre-tax this year - a 7 per cent rise - but a market price/earnings ratio and a yield of 5 per cent are a good base from which to start.

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