Bottom Line: Lucas shares could be running out of steam

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The Independent Online
LUCAS Industries' share price has been turbo-charged since October's appointment of George Simpson as its chief executive-elect. Even over 12 months the shares have outperformed by 35 per cent, driven by the group's recovery prospects.

The interim results do not spell out how much recovery is already taking place in Lucas's continuing businesses. Restructuring in the first half of this year and last disguises the underlying trends. It is clear that the automotive division, powered by the shift to diesel in Europe, has done well to increase market share and double its operating margin, to 3.2 per cent, in difficult conditions. Adjusting for divestments and exchange rate changes, division sales were up 12 per cent in a declining car market.

The aerospace businesses improved operating profits, too, despite weak civilian demand and continuing defence cuts.

But there is little prospect of significant growth in these markets for another two years or more. The US government investigation into Lucas Western for possible non- conformance with contracts also hangs over the division's future profits, to an unknown degree.

At Lucas's third division, applied technologies, operating profits fell sharply, and only in part because of disposals. The company admits its electronics businesses still need rationalising, and this will take two years, but says its longer-term growth prospects are better than those of the group's automotive and aerospace arms.

John Grant, group finance director, reckons that Lucas can attain 10 per cent operating margins within two years - plausible, if optimistic. A dividend cut is extremely unlikely, Lucas having held the level through the depths of recession.

The shares, though, more than incorporate the company's optimism. Even after yesterday's fall, Lucas remains on a prospective p/e ratio of around 35 for the full year. Even with the arrival of Mr Simpson next month, that rating requires too great a suspension of disbelief and the shares, relying heavily on a 4 per cent yield, have surely run their course.

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