Plodding GEC needs new blood

THE INVESTMENT COLUMN
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The Independent Online
Another plodding performance from GEC yesterday only underlined impressions that Lord Weinstock's collection of defence and electronics operations is stagnating.

With the troublesome succession issue set aside until next year, it was time to focus on the core businesses. While some progress was made, there was nothing in the figures to suggest that the unexceptional growth pattern of recent years was about to change.

The 13p rise in the share price to 314.5p was as much relief as anything else, and simply made up the ground lost during the pessimistic run-up to these figures, taking the price back to where it had stuck for much of the year.

Half-year profits rose 6.3 per cent to pounds 402m, but when the contribution from the shipbuilder VSEL is stripped out the underlying numbers are down. The biggest boost to profits again came from the GPT telecommunications operation - the 60/40 joint venture with Germany's Siemens - where the drive for exports lifted pre-tax profits by pounds 8m to pounds 62m. Ironically it was GPT's chairman who fell on his sword last month after the succession row. The South-east Asian markets are growing strongly and GEC said great efforts were being made in the region.

But it was a different story at the defence and power systems divisions, both mature businesses where margins are under tough international pressure. Defence profits were up only pounds 1m to pounds 80m, while the fall at power systems from pounds 78m to pounds 76m was particularly disappointing. Marconi and GEC Alsthom both faced higher provisions for development costs on contracts, though profits and margins should start to improve from next year.

The company has been underperforming the market for some time, while investors await news of how a rejuvenated board might inject some dynamism into the company. There is tremendous potential within the group of businesses but the suspicion remains that new blood is needed to unlock the earnings potential.

After yesterday's analysts' meeting, GEC watchers said Lord Weinstock appeared to have as tight a grip on the company as ever, and he had nothing to say about when his successor would be announced.

GEC's order book, boosted by the acquisition of VSEL, remains strong at pounds 13.8bn, though it is always difficult to know how this will translate into profits. The company's famous cash pile had fallen by pounds 223m to pounds 1.2bn since the end of March, and its share of net cash in joint ventures fell by pounds 194m to pounds 1.28bn. A 5 per cent increase in its dividend to 3.1p was in line with forecasts.

Group full-year profit forecasts of around pounds 970m, with earnings of 22.5p, put the shares on a forward multiple of 14. That is a discount to the market but an appropriate one. Fairly priced.

Greenalls closes in on top table

By this time next year Greenalls Group should be rubbing shoulders with the top brass of corporate UK. From being lost in a time warp under heavy family influence six years ago, the group now sports a market capitalisation of close to pounds 1.6bn, tantalisingly close to a coveted place in the Footsie.

While the steep climb through the ranks owes a great deal to acquisitions, it would be churlish not to give credit to the board's strategic vision - starting when Greenalls abandoned brewing following the Beer Orders and bought out the family investors' favourable voting rights to make the company's paper a tradeable currency.

Results for the year to September, announced yesterday, passed another milestone in the company's transformation, with taxable profits clearing pounds 100m for the first time by a margin of pounds 500,000. The previous year's pounds 74.8m included an extra week's trading which, when stripped out, implies underlying growth of 18 per cent.

Most of the leap in the year's profits was attributable to having the acquisition of the Devenish pub chain fully integrated into the system, benefits from purchasing power on beer supply agreements with the big brewers, and sharply increased takings across the pub estate.

Given that nearly all the numbers were known when Greenalls swooped on the Boddington pub and leisure group in October, it was no surprise yesterday that the reaction was muted and the shares slipped 3p to 537p. The price has outperformed the market by 13 per cent since that deal.

The picture is the same as those from powerful peers such as Whitbread, Bass, and Scottish & Newcastle. It is convergence in the leisure sector, where the challenge is to capture a decent share of increasing leisure time and discretionary spending, a challenge to which Greenalls is rising.

It is also in good shape financially. Despite the company's seemingly insatiable appetite for acquisitions and determination to reinvest heavily in existing businesses, Greenalls has remained broadly cash-neutral. Barring the temptation to write more acquisition cheques, current gearing of 70 per cent should fall by 5 points a year.

Greenalls profits this year should climb to pounds 147m, giving earnings per share of 38p, and beyond pounds 170m in 1996/97. The prospective p/e of 14.2 is only a shade below Whitbread and Bass, and although its yield is rather less attractive than its bigger peers, the shares are still worth buying.

Blue Circle

turns up heat

About time, too, Blue Circle's critics will say of the restructuring of its heating division announced yesterday. But even the bears will find it hard to fault the substance of the proposed changes, or at least those the company can discuss within the straitjacket of French employment law.

Blue Circle put together its Potterton Myson heating operations in a haphazard way over a number of years at the top of the market in the late 1980s. It shows now in an illogical operational structure across the UK, France and Germany, and the bulk of the pounds 55m being set aside to rationalise the business is to put the pieces together in a sensible fashion.

The good news for investors is that the cost of creating centres of excellence for boilers and radiators is offset by a pounds 55m profit from the sale of the company's landfill activities, leaving analysts' forecasts broadly unchanged. The other plus is the fact that Keith Orrell-Jones, chief executive, has been here before, stripping out costs with gusto from the core cement business and seeing profits soar.

Restoring the fortunes of heating is a more complex task than sorting out the cement side, with a need to improve the sales line through better marketing as well as the easier job of slashing overheads. But the City is convinced that, if anyone can succeed, Mr Orrell-Jones can.

The company says it is committed to heating, and to bathrooms in which it is proposing to invest a further pounds 40m over the next three years to build in state-of-the-art production technology. But whether it keeps the business, or tarts it up to sell it on, the restructuring is a welcome development.

Having cleared up one of the biggest uncertainties hanging over the company, the deal is also good news for the shares, despite the impression given by yesterday's 7p fall to 330p. On the basis of forecast profits of pounds 324.5m next year and pounds 354m in 1997, the shares stand on a prospective price/earnings ratio of 13 falling to 12.

With strong cash flow from cement and a rock-solid, nil-geared balance sheet, the shares are attractive.

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