THE INVESTMENT COLUMN : Doing the right things costs more than pounds 80m at BICC

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The Independent Online
Alan Jones, the saviour of Westland who was parachuted into the BICC cables to construction group last year, is doing all the right things as far as the City is concerned. The new chief executive quickly signalled his determination to get tough with a business which has not lived up to its aspirations for years, warning that the short-term effects would be bloody.

Yesterday's results for the year to December show he has more than lived up to his word. The figures were littered with write-offs and provisions, turning a profit of pounds 131m last time into a headline loss of pounds 67m. The underlying profits, cut from pounds 131m to pounds 109m, were in line with forecasts, and the market breathed a huge sigh of relief that no cash call accompanied the results, sending the shares 5p higher to 295p. But the exceptional charges came in a touch higher than BICC had led the market to expect and the temptation is to believe that things have got worse since the end of last year.

A pounds 78m loss on the sale of Clarke Homes, the housebuilding side, is now past history. It is the pounds 82m rationalisation of the core cables business that has raised most expectations for the future.

It is now clear that the east German low voltage cables operation was a disastrous acquisition, ravaged as it has been by the combined forces of a high mark and cheap Eastern European imports. But the decision to withdraw from most of the low voltage business, at a probable cost of close to pounds 30m, may not be the end of the pain. Power cable prices are clearly showing no signs of recovery in Germany and BICC clearly hinted yesterday it may have to take further action there.

In North America profits halved in highly competitive markets. Whether the pounds 29m to be spent on the exit from the construction market and refocusing the industrial side on larger customers is enough to reverse the trends remains to be seen.

Whatever happens, these measures should leave BICC with businesses commanding leading positions in areas like US utility and UK power cables. That gives backbone to Mr Jones's determination to wring better prices and hence better margins from customers. It is further supported by parallel rationalisation measures being pushed through by rivals Alcatel and Pirelli and the ending of the upward spiral in raw material costs.

If all goes according to plan, the cables business could hit Mr Jones's target of a 20 per cent return on assets by the end of next year. But Balfour Beatty, the engineering business, will remain a major drag, while privatisation is creating upheavals in traditional cable markets.

Given the uncertainties, the shares are fully valued on a forward rating of 18, assuming profits hit pounds 135m this year.