Bottom Line: T&N carries on with the paper chase

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THE FINANCIAL high-wire act that has been the inevitable consequence of T&N's relentless drive to become the 'natural choice' global supplier of pistons, friction materials and bearings to the motor industry is still impressively intact.

Half-year pre-tax profits 55 per cent higher at pounds 61m were well ahead of expectations and, although T&N gave a clear warning that customers could well start to destock this winter, analysts still dutifully scrambled to lift their forecasts for this year and next.

In order to grab new outsourced work from the motor manufacturers T&N has been compelled to embark on a programme of chunky acquisitions - more are clearly in the pipeline - while hurling vast sums at its operations in the form of capital investment, rationalisation and redundancies.

This strategy has meant periodic issues of paper to keep its finances on an even kilter and further calls on the capital markets are almost inevitable. So T&N, to keep faith with shareholders, has refused to cut its dividend despite years of uncovered earnings and strain on its balance sheet, where gearing is still around 60 per cent.

Not surprisingly, it wheeled out another enhanced scrip dividend yesterday with an accelerated, unchanged interim payout of 7.5p. T&N argues that, far from diluting the recovery with yet more paper, it is doing shareholders a favour. A huge jump in asbestosis- related payments from pounds 3m to pounds 22m in the half year exacerbated its unrelieved ACT problem. But if it did not pay such a big dividend the ACT problem would be much less pressing.

Hefty spending on investment and rationalisation has lifted margins above 10 per cent, pre- exceptionals, for the first time and 12 per cent remains the target. Volume gains on new contracts will help but sales value growth will be harder to find given price pressure.

Dividend growth is unlikely for years as a yield of 5.5 per cent rightly suggests. But a p/e premium of nearly 20 per cent over GKN on profits of pounds 115m this year looks harder to justify.

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