View from City Road: Aerospace spared fresh horrors

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THE LENTEN fast that British Aerospace has embarked upon will take a great deal longer than 40 days to produce results. But under the 'cost-down' religion espoused by John Cahill, chairman and ex-BTR man, a credible future that includes rising dividends is beginning to take shape.

The effects of a cost-reduction programme, expected to yield savings of pounds 200m a year at an annual rate, will not become apparent until the final quarter of this year. But armed with this and shorn of the running sore of regional aircraft losses, BAe could turn round from pre-exceptional losses of pounds 201m in 1992 to pre-tax profits of pounds 100m this year and double that in 1994.

In truth, both BAe and its share price have already anticipated something similar to this. Despite huge pre-tax losses and a pounds 220m overall net cash outflow, BAe has scrambled together enough distributable reserves to pay the interim dividend of 3p and a better-than-expected final of 4p.

Losses in 1992 would have been even higher if changes to the ways it accounts for pensions had not conveniently offset a pounds 36m DAF write-down and write-off of pounds 11m launch costs. The share price, which languished at 123p in late November, rose 13p to 265p partly out of relief that no new horrors were revealed and partly in response to the dividend. This leaves the shares on an historical yield of 3.5 per cent and a prospective multiple that is anywhere between 9 and 29, as analysts' forecasts for 1993 currently range between pounds 60m and pounds 150m - a measure of the market's uncertainty about BAe.

In the short term, profits from the bedrock defence division, which slipped from pounds 371m to pounds 352m, look set to fall. This assumes that new orders like the 48 Tornados lower profitability initially as mature contracts wind down.

Yesterday's figures were a reminder of how important it was to stanch the wounds of regional aircraft, since it appears to have lost more than pounds 400m in 1992. Other commercial aircraft, including a surplus from Airbus work, could cut losses from pounds 100m to pounds 60m, and Rover's pounds 49m deficit will shrink.

Until Arlington's property can be sold, cash flow remains a worry - end-year debt of pounds 257m and apparent gearing of 14 per cent sit oddly with net interest payments of pounds 126m in 1992 - in view of further sizeable outflows this year.

BAe shares require a risk premium. They are now discounting nearly doubled dividends, which must restrain the upside in an essentially trading stock.