Racal still on track to offer jam tomorrow

The Investment Column
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The Independent Online
Sir Ernest Harrison, chairman of Racal Electronics and member of the Jockey Club, has spent a lifetime taking big bets in business that have largely come good. Having seen off a bid for Racal from Cable & Wireless in 1988, he dispatched a hostile bid from the Williams conglomerate three years later by spinning off the mobile phone group Vodafone and demerging the Chubb security operations.

Shorn of its main money-spinners and left with a rag-bag of underperforming data communications and defence systems, the Racal rump was thought to be worth next to nothing by some analysts. In the event Racal's profits and share price have galloped ahead, helped in part by a series of acquisitions. The latest, the pounds 133m purchase of British Rail Telecoms, is already reaping considerable rewards for Racal. It made a maiden contribution of pounds 7.6m to group pre-tax profits 21 per cent higher at pounds 70.4m in the year to March.

BRT allows Racal to use its 16,000km network rather than lease lines from BT. And BRT has its own in-built customer base in the shape of newly- privatised Railtrack, the owner of the railway's signals, tracks and stations which account for the bulk of BRT's revenues. BRT also puts Racal in a better position to compete for lucrative business communications contracts and prestige projects.

Racal has been lucky in other areas as well, most appropriately in gambling, which makes up a quarter of group profits. The biggest windfall has come from the group's 22.5 per cent stake in National Lottery operator Camelot, which chipped in profits of pounds 15.2m.

But not all of Sir Ernest's charges are in such good form. Indeed, the shares slipped back 16p to 304p on news that Racal was taking a pounds 20m restructuring charge to cover the costs of getting data products, part of the data communications division, back into the black in 1997-98. A factory in Warrington is closing with the loss of up to 180 jobs, US manufacturing activities are being consolidated on a site in Fort Lauderdale and 17 stand-alone businesses are coming together.

The potential swing at data products, which lost about pounds 20m last year, could be pounds 35m if Paul Kozlowski, the division's new US boss, presses the right buttons. Shareholders should not hold their breath. For despite its recent success, Racal is developing a reputation for promising jam tomorrow. For example, the Ministry of Defence is not expected to award the pounds 2bn Bowman army radio contract until 1998, a year later than expected. Racal has no choice but to continue funding half the pounds 100m cost of the project, leading to hefty over-runs. House broker NatWest Securities has pared back its 1997 profit forecasts from pounds 86m to pounds 74m, implying a p/e ratio of 18. High enough.

John Waddington's fame amongst the general public has always been as maker of Monopoly, the board game, but the City knows it better for its unerring ability to seek out banana skins. The games business is long gone and the company must be hoping that its latest set of results means it can also dump its accident-prone reputation.

The figures were distorted by acquisitions and disposals over the past two years. Stated pre-tax profits fell from pounds 53.3m to pounds 11.9m in the year to March, but the previous year included a pounds 30.8m gain on the sale of the games business, while there was a pounds 13.8m loss on disposals in the latest period, mostly the Plastona plastic food cartons operation. The sale of Plastona should remove the last of Waddington's underperformers and give an immediate boost to results by eliminating trading losses that deepened from pounds 1.7m to pounds 2.4m last year.

Elsewhere, the plastic plates and cutlery side, badly affected by recent raw material price increases, did well to raise profits by a third to pounds 7.3m last year. Pharmaceutical packaging - pill boxes and the like - is another star. Boosted by last year's IP Container purchase in the US, which chipped in the bulk of last year's pounds 2.34m contribution from acquisitions, profits soared from pounds 2.46m to pounds 6.11m. The continued trend to so-called self-medication and over-the-counter medicines suggests the future is set fair for this division.

More questionable is whether the specialist printing operation, mainly involved in direct marketing to the financial services industry, can sustain its current growth once the boom in building society consolidations and flotations passes. Waddington also has to prove that it can win work from big customers like Unilever and Nestle, moving to pan-European sourcing to justify its investment in capacity, which is 15 per cent surplus to requirements. The omens are reasonable, with two orders already secured, but at number 10 in the European pecking order, Waddington may have to work hard.

Profits of pounds 30m this year would put the shares, up 6p at 248p, on a very reasonable forward multiple of 12. That could prove reasonable value, but investors should proceed with caution.

Powerscreen International, a maker of screening and crushing equipment, is a rare and largely unsung success story from Northern Ireland. In the last five years, the group has more than tripled turnover and more than doubled earnings per share.

That has taken pre-tax profits to pounds 36m in the 12 months to March, up 24 per cent on the previous year, on turnover increased by nearly a third to pounds 261m.

These sparkling results were achieved despite recession in Germany and the continued doldrums of the UK construction industry.

The secret of Powerscreen's success is its strong market positions in portable equipment, where it commands around 40 per cent of the world market for screening plant and holds the leading position in the manufacture of crushers in Europe. This has allowed it to cash in on the increased importance attached to maximising utilisation of land-fill sites in the wake of ever tightening planning restrictions.

Powerscreen reckons that it can add between 30 and 40 per cent to the value of waste by, for instance, crushing demolition waste on site, screening out reusable materials and in the process reducing the space required to dispose of the residue of unusable product.

Meanwhile, the portability of Powerscreen's equipment also gives it an edge for quarry operators, who are increasingly being limited by planning rules to the time during which they can operate sites, making it uneconomical to install fixed plant.

The company reckons the UK market alone is growing at between 25 and 30 per cent and it also sees further scope for growth in the US, Continental Europe and Asia Pacific.

Group profits close to pounds 42m this year would put the shares - at 467p, down 4p - on a forward multiple of 13. Good value, even after their strong run over the past year.