Lucas looks beyond its parts
Maker of car and aircraft components aims to expand into electronic systems in hi-tech drive
Sunday 19 March 1995
The shares have jumped from 172p to 200p this month, substantially reversing a downtrend that began at the start of the year after the US government fined the group $18.5m (£11.9m) for falsifying inspection records at its defence factory in Utah.
Although the penalty had been provided for, and is hardly material in a group of Lucas's size, news of such an aberration rattled the company's growing City fan club. Much mending of fences ensued, despite the fact that the US Navy threatened to debar Lucas from new military contracts in the US.
That was dismissed as no more than a negotiating tactic. Meanwhile, the City's engineering analysts swung in behind Lucas in a rare display of solidarity: according to the current issue of the Earnings Guide, of 14 leading researchers, eight say buy, one says add, and five say hold. Not a sell recommendation in sight.
"Leaving aside the upsets caused by the Department of Defense investigations and litigation," says Sandy Morris at NatWest Securities, "1994/95 promises to be a good year for Lucas."
Nick Cunningham at BZW rates Lucas a "core buy" on the grounds that the new management has improved the company's focus and product innova- tion is fuelling continued growth, after recovery and restructuring.
Colin Fell, Kleinwort Benson's Lucas watcher, adds: "The whole European car market is accelerating, and Lucas's customer base and products are growing faster than average. George Simpson will change the company enormously, giving it better performance and a different shape."
Mr Simpson, the former Rover and British Aerospace boss who became chief executive of Lucas last April, slammed £214m of provisions into last year's figures, which is why the group showed a loss for the year to last July. This is the traditional prerogative of any chief executive coming into an ailing business, and Mr Simpson took full advantage, including £88m to cover "future restructuring" and the likely costs of the US defence row.
Last December, he also used the excuse of a US acquisition to make a £55m rights issue, having already said that the group had sufficient resources to write a cheque for the purchase. So he is fully armed, in the financial sense, to take the group into the heat of battle.
Mr Simpson is understandably spending the weekend in quiet contemplation as he prepares to announce tomorrow's half-yearly results. But his finance director, John Grant, says: "We have made it pretty clear that we are going to continue to focus more intensely on supplying the automotive and aerospace industries. Our ambition is to become a fully recognised world-class player in those areas, into which our electronics operations will be increasingly integrated."
Messrs Grant and Simpson accept that Lucas has an image problem, in that it is still associated in much of the public's mind with brake-pads and bicycle lamps.
While Lucas is still very much involved in brakes, it is more interested in supplying systems in which it assumes responsibility for all the components of a braking system for a particular vehicle model.
This is all part of the group's drive up the hi-tech end of vehicles, airborne and road-based, making use of as much crossover as possible between the two. This will continue, as industry estimates suggest that the electronic content of new cars is likely to double from 20 per cent to 40 per cent over the next five years.
That was borne out by the recent £1bn order from Volkswagen to supply the group's ground-breaking EUI diesel fuel injector, which is greener and more economical.
"We have been dramatically outperforming the industry's recovery," said Mr Grant, "because of being in hi-tech systems. Once the market starts to recognise that we are not just in the dull old automotive business [Toyota please note], then we have the potential for a rerating of the shares. Rebuilding our reputation is an important part of what we are trying to do: there are historical images, such as bicycle lamps, which are no longer relevant."
The tempting prospect from the investor's point of view, although less palatable to Mr Simpson, is that if Lucas becomes sufficiently electronic it could be an attractive target to the likes of GEC, ever eager to offer extra bells and whistles to its defence customers.
Such is the euphoria behind the shares that they are bound to suffer a reaction along the way, but we maintain our recommendation from before Christmas that the shares are a buy.
Wellcome Image Awards: The most striking images from the world of science, including breast cancer cells under chemical attack and a photographer’s own kidney stone
Missing Malaysia Airlines plane: Terrorism explanation 'cannot be ruled out', says CIA
Bob Crow death: 'Admired by his members, feared by employers' - Tributes pour in for RMT union leader and 'working class hero' Bob Crow
Oscar Pistorius murder trial: Athlete repeatedly sick as court hears 'graphic details' of Reeva Steenkamp's post-mortem
How climate change helped Genghis Khan: Scientists believe a sudden period of warmer weather allowed the Mongols to invade with such success
Britain's top vet sparks controversy with call for ban on slashing animals' throats in 'ritual' slaughters for halal and kosher meat products
Poor 'live like animals' says Boris's privately educated sister after going on 'poverty safari'
Exclusive: Impact of immigrants on British workers ‘negligible’
Vince Cable: Teachers 'know absolutely nothing' about the world of work
Ukraine crisis: Russia pledges to 'retaliate against sanctions' as Ukrainian president says Crimea vote will not be recognised
The quiet diplomat: Catherine Ashton - recognised and admired in all the world’s troubled countries, yet ridiculed at home
- 1 Bad cattitude: Family call police after crazed and 'hostile cat with a history of violence' attacks baby before attempting to 'flee custody'
- 2 Family forced to flee home after discovering 'terrifying' nest of spiders in bananas
- 3 First Kiss: Filmmaker gets 20 strangers to make out on YouTube with awkward results
- 4 Grace Dent: Who cares if she spells it Barraco Barner? Gemma Worrall is more employable than some bookish arts graduate
- 5 Bob Crow death: 'Admired by his members, feared by employers' - Tributes pour in for RMT union leader and 'working class hero' Bob Crow
iJobs Money & Business
£1000 per month: Inspiring Interns: The company works with Tier 1 FTSE 100 Ban...
£35000 - £60000 per annum + Bonus + Benefits: Pro-Recruitment Group: You must ...
£60000 - £80000 per annum + BONUS + BENEFITS: Harrington Starr: A top, City ba...
VOLUNTARY ONLY - EXPENSES REIMBURSED : Reach Volunteering: Fantastic opportuni...