THE INVESTMENT COLUMN : BAe keeps clear of black holes

That British Aerospace produced another set of dull and predictable results yesterday is, perhaps, no bad thing. After years of financial black holes and write-offs it was comforting to see figures that for a second year running did not contain horror stories.

A rise in arms sales, improvements at Airbus Industrie, and another welcome cut in losses from the regional jets business meant pre-tax profits before exceptionals leapt to pounds 330m from a restated pounds 169m in 1994. Including charges, the profits rose to pounds 234m from a figure of pounds 208m, which was confused by a complex web of one-off losses and gains from the sale of Rover and aerospace restructuring costs.

Defence reported a pre-interest profit of pounds 487m against pounds 412m in 1994. A 2.4 per cent improvement in margins to 11.4 per cent, on sales that were slightly down at pounds 4.25bn, underlined the success in reducing costs. New business kept the total military order book at pounds 9.7bn, the same level as 1994.

On the commercial aerospace side, the area that almost tipped BAe into the abyss four years ago, operating losses were cut to pounds 118m from pounds 156m in 1994. The improvement was all the more creditable because the group was forced to fight for orders for Avro and Jetstream business at the expense of margins.

Profitability at Airbus also improved, though the European consortium is facing very tough competition from Boeing and there are worries about the amount of money BAe would contribute for a new Airbus jumbo jet. BAe was adamant yesterday that it would not enter any project that threatened to increase its cost base. Yet some investment in a larger Airbus is inevitable if the aircraft maker is to keep up with Boeing.

BAe's massive restructuring of non-core assets had reduced the company's net worth to pounds 876m in 1994, from more than pounds 2.6bn in 1991. The forthcoming flotation of the Orange mobile phones operation should see the residual 23 per cent stake marked up from near zero to between pounds 530m and pounds 570m in BAe's balance sheet. The group now looks well on its way to rebuilding the books.

The final dividend was something of a disappointment. The city was hoping for an 8p final rather than yesterday's 7.5p. This brought the total to 12.5p, up 25 per cent, on earnings per share 116 per cent ahead to 48.8p. BAe's policy these days is to keep dividend cover at three times over the longer term.

Despite its recent recovery, the share price, up 1p to 870p yesterday, still does not reflect the progress so far. With all divisions now showing improvement, and further scope for cost-cutting and consolidation in the defence business, BAe remains a good long-term bet.