Bottom Line: Racal is protesting too much

WHILE GEC, whose profits and cash march hand in hand, could be forgiven for regarding FRS3 as a lax accounting standard, Racal Electronics provides a vivid example of why it is a good thing, shining light into dark corners.

Sir Ernest Harrison was certainly protesting too much at the stock market's sledging of Racal's share price yesterday, following its unexpected half-year loss.

If we are to ignore a pounds 20.2m exceptional provision, including a pounds 13.9m goodwill write-back, for the part-disposal of the disastrous Racal-Redac, then what about the revelation that 1992/3 pre-tax profits of pounds 51.4m were 'assisted' by the release of pounds 11.1m of prior-year provisions?

Was it not Racal's forecast of pounds 50m or more pre-tax profits, against market estimates of pounds 40m, that helped to see off Williams Holdings' pounds 720m bid two years ago?

No wonder the stock market is beginning to feel a return of the old unease at Racal's performance now the company is shorn of the solid but reliable Chubb.

Apart from Racal-Redac there were three other disconcerting turns of events. Radio communications sales dropped by 20 per cent and profits fell by more than a third as Racal lost out to defence cuts and intense US and French competition after Desert Storm. Don't worry, says Racal, sales will bounce back.

Data Communications profits were also down by a third but a pick-up is also expected thanks to the phasing of deliveries and orders. Unfortunately, the costs of bidding for the Bowman UK army contract and the National Lottery will leave full-year operating profits little changed.

A pounds 24m cash outflow, the third unsettling item, is mainly attributable to unplanned stock building, which Racal blames on contract delays. Gearing of 10 per cent is comfortable but the contrast with GEC is again noticeable. Assuming pre-tax profits of pounds 50m, excluding exceptionals, a p/e at 162p is 16.5 and a yield of 3 per cent is not worth chasing.