Bottom Line: Mistakes at Amec turn Cockshaw contrite

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The Independent Online
SIR ALAN COCKSHAW, chairman of Amec, sounded suitably contrite as he admitted that 'three serious mistakes' had pushed the group into an pounds 87.5m loss in 1992 - almost seven times the previous year's loss. A 'deplorable' performance from the business in Australia cost more than pounds 12m; problems with cladding on its Brighton property development cost pounds 15.9m; and a combination of 'bad luck and bad judgement' in its 20 per cent investment in Power Corporation, the Irish property group rocked by a disastrous involvement with the Trocadero development in London, produced a further pounds 18m write-off.

The hairshirt was, however, quickly shrugged off. The problems of 1992 will not recur. Management changes had been made, systems and controls had been strengthened and the resilience of its building and mechanical engineering businesses, despite the recession, means 'the opportunities are considerable'.

Shareholders should not be taken in by his confidence. Instead, they should remember that - as Sir Alan admitted - the board was responsible for taking on a range of overseas businesses 'which should have been rationalised earlier' and for 'going too far too fast in housing and property', where write-offs totalled pounds 63m, on top of the pounds 60m charged last year. (Oddly, they leave the average cost of a housing plot at 20 per cent of selling price, the same as last year).

They should also note that the group had to resort to financial engineering to allow it to pay even a 3p dividend, less than two thirds of last year's and 40 per cent below the level it indicated at the interim stage. It is resurrecting pounds 96m of goodwill previously written off against distributable reserves, and charging it instead against the share premium account. Despite that, Amec will be left with just pounds 13.5m of retained profits - and an on-going commitment to pay pounds 11.3m of dividends on the pounds 170m of convertible preference shares. Small wonder that Sir Alan said rebuilding dividend cover will take precedence over increasing the payment to shareholders.

Sir Alan is fortunate that his luck will turn this year. The Limehouse Link and the Tiffany contract will boost profits, and there should be a tax credit on the write-downs, boosting earnings to at least 10p a share, compared with 3.7p before exceptionals in 1992, a rise that helped push the shares up 5p to 81p.

Leaving these aside, Amec's fortunes will increasingly depend on contracting work at tight margins, which could be further undermined as materials prices rise. Until Sir Alan and his team demonstrate that they can avoid the errors of the past, the shares should be avoided.