Racal shares plunge 18% on warning

Racal Electronics will this morning attempt to regain the confidence of investors after an unexpected profits warning by the defence and telecommunications group yesterday sent its shares plunging by more than 18 per cent.

The news, which stunned City analysts, wiped more than pounds 125m off Racal's stock market value, ending a dire few months in which the company lost out to British Telecom in a pounds 1bn contract bid to replace the armed forces' telephone network and learned of further delays to another programme to replace British Army mobile radios. The shares ended the day 50p lower at 225p.

In a statement to the Stock Exchange, Racal warned that its pre-tax profits for this year were likely to be pounds 20m less than analysts had expected, at around pounds 50m. This represents a drop of 29 per cent from the profits already reported for last year of pounds 70.4m.

Racal also surprised analysts by bringing forward the announcement of its results for the first six months of this year from Thursday to today. The statement said the results were expected to show profits of pounds 21m after a previously announced exceptional charge of pounds 10m for the restructuring of the Data Group subsidiary.

The announcement blamed a "significant reduction" in orders from the group's Radio Communications division, which makes a range of mobile radio systems sold to military forces around the world.

The difficulties were likely to reduce the radio arm's sales this year by pounds 30m, compared with last year's pounds 161m, pushing the business into the red. Of the pounds 20m drop in profits, the radio division would account for pounds 15m, with a further pounds 5m of what the company described as "bits and pieces, though nothing serious".

Senior directors, led by chief executive David Elsbury, met last Friday for a regular monthly board meeting where continued problems with the progress of the radio arm came to a head.

Mr Elsbury said yesterday: "There are slippages in three major orders, one with the UK government, one with the Middle East and one in Latin America. We haven't lost the orders but we could see them slipping. We decided, I think correctly, to act prudently and inform the City."

However, the statement left analysts perplexed. One said: "Selling military radios isn't like running Marks & Spencers. Orders for these products are booked at least a year or 18 months in advance. So why did it take so long for the board to learn about this?"

Mr Elsbury insisted he was happy with the way the radio arm was run, but blamed its continued decline on world-wide defence cutbacks. "We are in total control of our forecasting but lead times in military radios are three years," he said.

The division makes the Jaguar battlefield radio which has proved popular with many armed forces around the world and has notched up sales of some pounds 400m since its introduction in the early 1980s. But in recent years Racal has faced fierce competition from larger defence electronics suppliers such as GEC of the UK and Thomson CSF from France.

The company is currently reviewing the Radio Communications business's long-term future, though these further delays to normally lucrative military contracts could put a question mark over its survival as a major part of the group.

Another problem has been the UK government's repeated slippage to a pounds 2bn order to replace the Army's battlefield radio network. An announcement on the contract has been delayed from 1997 to 1999.

Comment, page 19

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