Bottom Line: Racal's communications breakdown

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The Independent Online
RACAL Electronics may have won the lottery battle but it has been in grave danger of losing the war in data communications.

The sterling work put in to developing Racal's network services, a key factor in the victory of the Camelot lottery consortium, meant that the remainder of the company's data communications product range has been severely neglected.

The consequences are all too evident in Racal's 1993/4 results and show why the market has toyed in the past with the idea of some sort of bid from Cray Electronics to put matters right.

Despite exceptional charges and reorganisation provisions of pounds 19.5m in 1992/3 and a further pounds 6.2m last year, operating profits in 1993/4 fell from pounds 66.7m to pounds 55.9m.

This was thanks mainly to a dismal performance at data communications, Racal's single largest business at 42 per cent of sales, where operating profits tumbled from pounds 12.6m to pounds 3.5m on sales of pounds 373m.

In vintage style Racal, radiating optimism, is embarking on a high- profile shake-up of the rest of data communications.

It will belatedly cut its exposure to mature and obselete products - 30 per cent of data communications sales - and invest in growth products, now barely 10 per cent of sales, where a seven-fold increase in sales is targeted over three years.

In the short term, pounds 10m of cost reductions in data communications this year will help restore margins to a modest 5 per cent, implying profits of pounds 20m.

A further margin rise to 7.5 per cent is promised for 1995/6 when sales, including the lottery effect and other network gains, should easily top pounds 500m taking divisional profits towards pounds 40m including a possible pounds 10m from the lottery.

Racal's share price has recovered from its severe underperformance last winter and no wonder. Inspired by the promised revamp of data communications, Racal's house brokers, Smith New Court, lifted its 1994/5 forecast from pounds 58m to pounds 70m and is projecting a 36 per cent rise in the dividend to 5.8p with more to come in 1995/6.

A price/earnins ratio of 15.5 and a yield of 3 per cent is not a high price for such hectic growth.