Plenty to worry about at BICC

THE INVESTMENT COLUMN

BICC's new chief executive, Alan Jones, built up a good reputation at Westland, the helicopter manufacturer, but his management skills are going to be sorely tested at his new charge. The cable maker and owner of the Balfour Beatty contracting business may be in capable hands but it is operating in appalling markets.

Yesterday's interim figures announcement gave nervous analysts plenty to worry about and forecasts, which had already fallen since the spring, tumbled again. Smith New Court came down from pounds 152m for the current year to pounds 142m and the share price, which has slipped from a high of 476p at the beginning of 1994, fell a further 5p to 320p.

That followed a decline in first-half profits from pounds 63m to pounds 60m, a fall in earnings per share from 9p to 6.5p and a one-third cut in the interim dividend to 4p. BICC's problems are legion, but the main ones are Germany, raw materials prices and the UK building market.

With the benefit of hindsight, the acquisition of KWO in Germany in 1993 could not have been worse timed. Since then pricing has deteriorated sharply as cheap eastern European cable imports have undermined the domestic product. That and rationalisation costs knocked a pounds 15m hole in profits in the first half.

To be fair, the problem is not specific to BICC - both Siemens and Alcatel, its main competitors, have made public their inability to make any money out of the German market.

The soaring cost of copper last year - up from about $2,000 a tonne to $3,000 - wreaked havoc with the company's working capital. It increased by about pounds 100m during the half year at an annual cost to the interest charge of the best part of pounds 10m.

Balfour Beatty continues to outperform much of the rest of the UK construction industry but margins of only 1.6 per cent are still nothing to write home about. Commendably, the division has increased the proportion of its order book represented by overseas work from 28 to 44 per cent.

At home, Balfour is one of the leading lights of the government's Private Finance Initiative, which would be a good thing were the PFI not such a time-consuming, expensive shambles. Expected to generate incremental work in addition to existing government schemes, it is at best a replacement for government spending and takes a long time to repay chunky tendering costs.

Add the planned withdrawal from the difficult UK house-building market, uncomfortably high gearing and poor cashflow and a prospective p/e of 19 on this year's forecast makes the shares unsustainably expensive, unless you believe the recent whispers about Siemens preparing a bid. The company poured cold water on that yesterday and the shares are a sell.

Rentokil puts faith in security

Rentokil, the pest control to potted plants group, is one of the few go-go stocks of the 1980s to have survived untarnished in the more staid atmosphere of the 1990s. Chief executive Clive Thompson has hung his reputation on producing 20 per cent per annum growth in earnings, a target he has been beaten in each of the past 13 years - although in the last couple he has only scraped home by a whisker.

Some of the best hopes for maintaining the record come from security, a business that Rentokil only moved into when it acquired Securiguard for pounds 75m two years ago, and where the scope for margin improvement remains substantial. Margins of 6.5 per cent last year have a long way to go to catch up with the group level of 24 per cent, but yesterday's $51.5m (pounds 32m) acquisition of the US manned guarding activities of Mayne Nickless will give them a good leg up.

Profits of $4m last year are minuscule in the acquired business, but its $160m turnover at a stroke doubles the size of Rentokil's existing security operations. The new operation neatly complements Securiguard's existing US presence, which is all on the east coast between New York and Baltimore, taking it to most of the other main population centres. It also shoots the business from nowhere to around sixth or seventh position in the US and takes it into Canada for the first time.

This critical mass, along with further bolt-on acquisitions, should enable margins to double in the US to around 5 per cent in the next year or so, Mr Thompson says. The performance of Securiguard in the UK, where margins have been raised to over 7 per cent from 4 per cent at acquisition, shows what can be done.

Yesterday's deal will make only a small dent in Rentokil's cash pile, worth a net pounds 67m at the end of last year. There is still scope for the security business to make an assault on Europe, where it is not currently represented.

Next Thursday's interim figures to June should bring further news on the strategy. In the meantime, the latest acquisition will not make much difference to forecast profits for this year, expected to show another 21 per cent rise to pounds 214m. At that, the shares, up 0.5p at 290.5p, remain high enough on a forward multiple of 20.

Bullers rescue fails to convince

Bullers is in the wars again. Just a day after the film editing to fire surround group was forced to deny that a creditor had issued a winding up order, it emerged yesterday that Jim Slater, the erstwhile financier who was Bullers' most high-profile backer, had reduced his holding.

On Friday, Gladerange Executive Pensions and Salar Properties, two Slater vehicles, sold 1.57 million shares, taking their interest to below the notifiable level of 3 per cent. Clients of Slater Investments, managed by Mr Slater's son Mark, also apparently took the opportunity to trim their holdings.

The 2.5p-3p a share realised for the stakes is a far cry from the 11.7p the Slaters paid for their original 6 per cent stake acquired in August last year.

The move represents a significant vote of no confidence in the plans of Bullers chairman David Cunningham to revitalise the formerly ailing group. But the City has become increasingly sceptical about his ability to pull off the restructuring.

Last week's announcement of the disposal of its giftware division for pounds 1 smacked of a fire sale. Although an earn-out could bring in pounds 600,000 in shares in CountyGlen, the Irish buyer, the main element to the deal will be the removal of over pounds 700,000 of debt. The reduction of borrowings at the Glenlomond Fire Surrounds subsidiary also seems to form the centrepiece of a scheme to float the business on the Alternative Investment Market.

Mr Cunningham says he has been approached by a number of investors ready to inject up to pounds 1.5m into Bullers, but they have yet to show their hand. Even with the shares at a record low of 2p, they should be avoided.

COMPANY RESULTS

Turnover pounds P/Tax pounds EPS Dividend

BICC Group (I) 2.14bn (1.93bn) 60m (63m) 6.5p (9p) 4p (6p)

Richardsons Westgarth (I) 51.4m (39.4m) 2.4m (1.5m) 4.3p (3.1p) 1.4p (1.3p)

Rosebys (I) 25.8m (24m) 641,000 (736,000) 1.9p (2.3p) 1.6p (1.5p)

Telegraph (I) 121.4m (136.3m) 21.5m (30.3m) 9.6p (15.8p) 5.5p (5.5p)

Whinney Mackay-Lew (F) 2.95m (2.84m) -463,000 (-195,000) -6.5p (-2.8p) -(-)

(Q) - Quarterly (F) - Final (I) - Interim

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