Vickers fires on three cylinders

Investment Column
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The Independent Online
Vickers has found it difficult to fire on all four cylinders at once of late. Just as it sorted out the recession-ravaged Rolls-Royce luxury cars arm, Vickers' medical equipment division ran into the squeeze that has hit health spending on both sides of the Atlantic in the past few years.

Yesterday's half-year figures to June show that the group is still finding it difficult to keep all the plates in the air. Pre-tax profits rose 18 per cent to pounds 31.8m in the period. But that hid a slightly disappointing result from the automotive division, which, encompassing Rolls-Royce and the Cosworth high-performance engine business, still remains overwhelmingly the biggest part of the group. Vickers' chief executive, Sir Colin Chandler, who is to take on the chairman's role next year, describes 1996 as a year of consolidation and, to be fair, some of the dip in automotive profits from pounds 14.8m to pounds 13.5m should represent an investment for the future. Group capital expenditure is up a chunky 30 per cent and research and development spending ahead by 10 per cent in the first half, with much of it devoted to developing a replacement for the current "bread and butter" four-door Rolls and Bentley models.

Sales of these bottom-of-the-range models managed a handy 26 per cent rise in the latest period, but the margin suffered as fewer of the seriously wealthy ordered cars in the pounds 250,000-plus bracket. Elsewhere, the picture is brighter. Management changes, new diagnostic products and rationalisation are starting to turn round the medical side, which saw its losses cut from pounds 2.2m to pounds 200,000 in the period.

The glitches holding up the pounds 1.5bn British Army order for Challenger 2 tanks also seem well on the way to resolution, providing a solid base for the defence side up to 2000. Icing on the cake should be provided by potential tank orders from the Middle and Far East.

With minimal gearing, Vickers has plenty of firepower to build up its smaller divisions through acquisition. But, assuming profits of around pounds 79m this year, the shares, down 11p at 260.5p, are high enough on a forward multiple of 17.