View from City Road: BAe finances in shocking state

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The Independent Online
TWO earthquakes, 12 months apart, are more than any company can bear without doing lasting damage to its foundations. Yesterday's news from British Aerospace, coming so soon after last year's rights issue, raises the question of whether the company can survive in its present form.

The fact that Britain's largest manufacturing employer cannot pay a dividend without court sanction is shocking. So too is its pounds 1bn provision for restructuring - which the company prefers to call pounds 750m net of a tax credit even though it will be accounted for before tax.

Perhaps even more worrying than these headline-hitting items was the size of the losses on commercial aircraft. BAe 146, which is due to be put into a joint venture with the Taiwanese, lost pounds 167m before interest in the first half. At the same time the Turboprops business, which will be moved to Prestwick, lost a further pounds 111m.

Even if you accept the company's description of the pounds 140m 'scale back and recourse' as a one-off item, there were underlying losses of pounds 138m in the half year in the two businesses. If you also accept that it will reduce costs by pounds 200m a year, these businesses would still be losing pounds 170m a year, if the Taiwanese venture does not go ahead.

It was these figures that gave investors an uneasy feeling yesterday and sent the shares as low as 113p, valuing the company at pounds 423m, or less than the value of last year's rights issue.

The company says it has net cash of pounds 230m, but that includes advance payments from customers. Excluding these, its net borrowings stood at nearly pounds 1bn, against pounds 1.5bn last year, the fall being almost entirely attributable to the rights issue. The company says June represents a seasonal peak, but it will suffer a huge outflow as pounds 600m of redundancy and other payments provided for in the big provision go out. (The rest of the pounds 1bn provision is for non cash items.) This raises the possibility of borrowings rising towards 80 per cent of much reduced shareholders' funds.

Meanwhile it is hard to assess interest cover, given uncertainties over the Taiwanese joint venture, the Saudi contract and the European Fighter Aircraft. Dividend cover is anyone's guess.

Dick Evans, chief executive, says no bidder - not even GEC - would have the stomach for the continuing problems of regional aircraft. If that is the case, shareholders should press for a clean break - disposal or closure - at the earliest opportunity.