Bottom line: Racal gets its eye back on the ball

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The Independent Online
WHILE the Vodafone juggernaut powered on no-one really cared that the rest of Racal was an underperforming backwater given a negative value by the stock market. Kicking away the mobile phone and Chubb security crutches has concentrated chairman Sir Ernest Harrison's mind marvellously.

Pulling pounds 33m out of working capital, to contribute almost half of a pounds 71m cash inflow last year, suggests just how much Racal stands to gain from a dose of tough management. It is not before time.

Yesterday's figures, showing a 24 per cent increase in operating profits from pounds 49m to pounds 61m, showed that his cost-cutting programme is beginning to have the desired effect. Staff numbers fell by about 700 last year to 12,000.

Racal's shares, which have almost doubled since the Chubb demerger last year, rose another 10p yesterday to 227p on what were better-than-expected figures.

Profits got a nice kicker from a reversal of last year's pounds 9.4m interest charge into pounds 4.3m receipts this time. A pounds 10m reduction in last year's exceptional redundancy charge lifted pre-tax profits from pounds 16.1m to pounds 51.5m. Earnings per share of 11.5p (4.3p) covered the 4.25p dividend comfortably.

It would be churlish to dwell on the fact that pounds 7m of the costs related to this year rather than last. They were, however, offset by a conveniently timed profit on a dollar borrowing repayment.

The improvement in operating profits was almost entirely due to a jump in Data Communications' profits from pounds 1.5m to pounds 12.6m. That is still a pathetic return on sales of pounds 371m and compares dismally with the returns offered by others in the industry such as Cray.

Looking forward, a margin of 10 per cent ought to be possible now that management's eye is back on the ball. Key to the success of the division will be how successfully it makes the belated transition from a shifter of commodity hardware products to a provider of services that can generate recurring revenue. A return to respectable margins would transform the company.

The importance of data communications was underlined by the flat or declining performance of the rest of the business. Worst hit was the defence, radar and avionics division, which could not buck the decline in defence budgets from the Western powers.

Racal says the flip side of the end of the Cold War is a promised flood of orders from vulnerable developing countries. And further out the trend towards fast response forces has prompted a complete revamp of the Army's radio systems. Racal says it is confident of getting a slice of the pounds 1bn- pounds 2bn Bowman programme.

In the meantime, cost-cutting will continue to drive profits and pounds 63m looks plausible this year followed by pounds 74m in the year to March 1995. A prospective p/e of 16, falling to 14, does not reflect all the recovery potential. Good value.