Shares: GEC giant wakes for a parade

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The Independent Online
EVIDENCE is growing that GEC, the electronics giant that has been slumbering for some years, may be one of the surprise stars of the stock market in the 1990s.

The order book is being fattened at a dramatic rate with power stations, high-speed trains, defence exports and a string of new products on the leading-edge of technology from a massive research and development effort. When allied to the group's traditional budget-conscious management skills, this could mean profits marching ahead at between 10 and 15 per cent a year for the rest of the decade.

GEC's glorious period of growth in the 1970s from its defence business, Marconi, ended with the Falklands War and was further checked by the end of the Cold War and the 'peace dividend'. Interest switched away from companies such as GEC, which have notoriously cautious accounting policies, and swung to the ritzier stars of the bull market of the 1980s. Now companies whose stated profits are validated by strong cash generation are in vogue. GEC is one, with a cash mountain that is expected to have reached pounds 2bn when full-year figures are reported in early July. Even more enticing is the feeling that the group is poised to become a significant beneficiary (especially after sterling's devaluation) of the developing up-swing in the global capital goods cycle.

There is also a view that GEC is starting to reap the benefits of a wholesale repositioning in the late 1980s. The acquisitions of Plessey and part of Ferranti mean that GEC now has three core divisions, operating in electronic systems (GEC and Marconi); telecommunications (GPT, a 60:40 venture with Siemens); and power engineering (GEC Alsthom, a joint venture with Alcatel Alsthom of France).

There are also a string of smaller businesses, including consumer goods, electronic meterology, office equipment and printing, medical equipment, electronic components, distribution and associated companies. These made combined profits of pounds 153m in 1991/92, compared with pounds 260m from electronic systems, pounds 157m from power, pounds 127m from telecommunications and pounds 105m of investment income. There is a possibility, though a rather remote one, that GEC might sell all the smaller businesses for some pounds 1.5bn, giving itself an even more colossal cash pile.

The star division is GEC Alsthom, which analyst Mike Styles of the stockbroker Smith New Court estimates may now have a staggering pounds 13bn order book, ensuring its workload for the next five years. The joint venture is the world market leader in two key areas - gas- fired power stations and high- speed trains. The potential is enormous: Europe alone is expected to spend pounds 100bn on high- speed trains before the end of the decade, and there will be activity in North America and the Far East. Many countries are placing orders for power stations, and there are expected to be more, especially from places such as China, where the group has already built more than 20.

Marconi is fast reviving, despite continuing defence cutbacks in Nato countries. Lord Weinstock envisaged that the civil side of Marconi would expand business from 26 per cent to near 50 per cent by 2000 but this is unlikely because of booming defence exports to places such as Malaysia and the Middle East.

The telecommunications division has been more sluggish and Siemens has made no secret of its desire to buy GEC out of the GPT venture, but the British company seems unwilling to sell.

At the same time, there are hopes that economic recovery will perk up the performance of the group's smaller businesses.

Order book trends are most critical to GEC's share price. At the halfway stage, GEC's order book was up 12 per cent to a record pounds 11.9bn and it is thought that the full-year order book will be ahead by at least that amount, with a succession of further large contract wins likely this year.

Orders take time to translate into profits, but this higher revenue is flowing through a company that has trimmed its workforce by some 20,000 employees during the recession and is notorious for penny- pinching. Estimates of pre-tax profits are up from pounds 829m in 1991/92 to pounds 850m for the year ended 31 March, followed by pounds 940m for 1993/94 and well through the billion mark in 1994/95. That would drop the p/e ratio to the low teens, with GEC shares at 325p. The prospective dividend yield is already an attractive 4 per cent - excellent value for an awakening giant.