Trafalgar cash call beckons

THE CITY is bracing itself for a major cash call from Cunard-to- construction group Trafalgar House next year, possibly as much as pounds 200m, as it seeks to bolster a battered balance sheet after warning of huge 1995 losses last week.

Trafalgar itself says a rights call, or refinancing, by 26 per cent shareholder Hongkong Land, has not been discussed, but it is still too early to rule anything out.

The shares touched a record 18p low last Wednesday amid market jitters, before the stock exchange finally forced a trading statement.

Chief executive, Nigel Rich, warned losses would be substantial when it reports figures in December after contract write-downs and sweeping provisions for restructuring. Analysts estimate final pre-tax figures will be between pounds 150m and pounds 200m in the red.

Problems at Trafalgar, Britain's biggest contracting business, date back to over-ambitious expansion before recession struck. Any rights call would be the fourth in just five years. Nearly pounds 1bn has already been pumped in by long-suffering investors including HK Land - part of the colony's giant Jardine Matheson empire - which baled the group out in 1993.

The group's founder, Sir Nigel Broackes, one of Margaret Thatcher's favourite tycoons, set about collecting a basket of prize baubles, including Express Newspapers, the Ritz and the Cunard cruise line.

The disastrous acquisition of North Sea rig builder Davy four years ago tipped the balance and set the scene for HK Land's rescue, part of Jardine's diversification before Chinese rule in 1997.

The Ritz was finally sold for pounds 75m two weeks ago, while Cunard is under review alongside house builder Ideal Homes, which analysts estimate may fetch up to pounds 150m if sold.

That would pare the group back to its core engineering, metals and construction businesses, including John Brown and Davy - the areas where its major problems now lie.

Building power stations, chemicals plants and oil rigs around the world is a huge but cut-throat business. Trafalgar made pre-tax profits of just pounds 45.6m on its total pounds 3.8bn turnover last year, and over half of that came from Ideal Homes.

Contracting has gone through deep recession in the 1990s, with no sign yet of the cyclical upswing Jardine was counting on when it swooped. "Clearly HK Land bit off more than it could chew at Trafalgar. It is a far more problematic business than anticipated," said Paul Beaufrere, analyst at brokers James Capel.

"I'm looking at a dilutive rights issue in time. The timetable has to be next year. Announce the results first and take the shock," he added.

Trafalgar shares stabilised at 22p on Friday, valuing the group at pounds 420m, as HK Land confirmed its position as a "long-term investor". HK Land has deep pockets, but even at this level, analysts do not believe a full bid is on the cards.

Trafalgar is at pains to point out that debt - pounds 248m at the half year stage - has now stabilised, and that losses will not breach its pounds 500m net asset banking covenants.

However, this week's warning that preference as well as ordinary dividends may be cancelled leaves the market wary over cash generation. Restructuring costs, trading troubles, disposal delays and misjudged forecasts make a fresh cash call likely, analysts say.

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