Trafalgar's pounds 321m loss stuns City

Engineering setback: British giant's profits plummet as biggest shareholder quells rumours that it is losing patience
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The Independent Online

Deputy City Editor

Trafalgar House stunned the City yesterday with a much bigger loss than even the gloomiest forecasters had expected. Long-suffering shareholders in Trafalgar, which owns the QE2 and until recently London's Ritz hotel, were dealt a further blow with the news that neither ordinary nor preference dividends will be paid until the group is making "sustainable profits" again.

The pounds 321m loss for the year to September, compared with a pounds 46m profit in the previous 12 months, included pounds 204m of one-off reorganisation costs and asset write-downs and capped a disastrous year for one of the great names of British engineering. Hongkong Land, the company's largest shareholder, issued a statement of support to quell persistent rumours that it was losing patience with its ill-conceived investment.

Simon Keswick, chairman of Trafalgar, said: "The board has determined to take vigorous action to tackle all the problems that have beset Trafalgar House in the past. A full turnaround requires a culture change and will not be brought about overnight."

One of the stock market's worst performers in 1995, Trafalgar's shares fell a further 2.5p to 24.5p yesterday, valuing the whole company at only pounds 264m despite its sales of almost pounds 4bn. Since the beginning of the year, they have slumped from a high of 76p. In 1987, the shares peaked at 331p.

At the current level, the company is valued at less than Hongkong Land paid for its 26 per cent stake in 1992 when it chose Trafalgar as its vehicle for expansion outside the colony.

Yesterday, the company, the colony's largest group, said it had full confidence in Trafalgar's management, adding that it remained a long-term investor. It warned, however, that its share of the loss would result in a significant reduction in profits for 1995.

Analysts were wrong-footed by the size of the reported loss because many expected that borrowing covenants based on Trafalgar's net asset value would ensure that any loss for the year was capped at about pounds 200m. The company said yesterday it had renegotiated covenants dependent on the ratio of borrowings to shareholders' funds that were less onerous.

Trafalgar's bombshell contained a litany of catastrophic statistics. Borrowings grew 10-fold during the year, the value of the company's net assets halved from pounds 699m to pounds 355m and Nigel Rich, chief executive for the past 15 months, warned the cash haemorrhage would continue this year with at least another pounds 100m flowing out.

The massive loss follows a year in which Trafalgar failed in its bid to buy Northern Electric for pounds 1.2bn and lived through a public relations fiasco after a cruise on the luxury QE2 cruise liner saw passengers travelling to the US in far from ideal circumstances while a bodged refit was completed.

Included in the exceptional charges was a pounds 31m provision to cover "a radical programme of change" at Cunard, pounds 8m to refund passengers whose cruises were ruined and pounds 79m to provide against a write-down of the value of the fleet. Even before these one-off charges, an operating loss of pounds 16m was struck against profits last time of pounds 8m as occupancy levels and rates per berth sold failed to match expectations. Although Trafalgar admitted that further asset disposals would be required to reduce borrowings, there was no indication as to which part of the wide-ranging empire would be up for sale. Cunard is thought to be unsaleable until its deep-seated problems are sorted out and it is closer to profitability which, the company, warned might take three or four years.

Other immediately saleable operations include Ideal Homes, the housebuilding arm that increased profits from pounds 19m to pounds 28.4m and represents one of the few successful activities within the group. Trafalgar said it would be pulling out of its less attractive US housebuilding operations.

The other main drag on the group came in the engineering operations where heavy losses at the 1991 acquisition Davy, contract problems in power engineering and continuing red ink at Sofresid, the French subsidiary, dragged the division into a pounds 110m loss even before pounds 65m of restructuring charges.

Mr Rich said that the company was still working through contracts - written in the early 1990s - that committed Trafalgar to contractual liabilities without providing any protection against subcontractors who underperformed.

Comment page 19

Trafalgar's bombshell

The climax to a calamitous year

Pre-tax loss of pounds 321m vs pounds 46m profit

One-off charges balloon from pounds 24m to pounds 204m

Borrowings soar from pounds 20m to pounds 229m

Net assets collapse from pounds 699m to pounds 355m

No dividends for foreseeable future

Cash haemorrhage continues

Countdown to disaster

June 1991 Davy acquired

Rights issue raises pounds 310m

Sept 1992 Hongkong Land tenders 85p a share

Feb 1993 Rights issue raises pounds 205m

Oct 1993 Hongkong Land acquires 25 per cent stake

Dec 1993 Rights issue raises pounds 400m

Aug 1994 Nigel Rich appointed chief executive

Dec 1994 Launches pounds 1.2bn for Northern Electric

Disastrous QE2 Cruise ends in PR fiasco

Mar 1995 Professor Littlechild unveils review of electricity prices

Rec share prices slump

May 1995 Half-time losses reach pounds 48m

Aug 1995 Northern Electric bid officially withdrawn

Oct 1995 Ritz sold for pounds 75m

Dec 1995 pounds 321m loss announced