View from City Road: Best hope for APV holders is a bid

The City had every right to be shocked by the halving of APV's interim dividend to 1p. It has steadfastly held the payment through the last four years of recession, despite making insufficient earnings to cover it, so it is hardly surprising that with times now improving, shareholders expected the next movement to be up.

Even more surprising is that the cut should come when the business itself is at last showing signs of improvement. Interim profits rose from pounds 4.4m to pounds 5.8m, earnings doubled to 1p, the order book is looking healthy and the disastrous French business - which lost pounds 3.6m in the first half - has been sold. Neither is it short of cash: disposals have cut borrowings from pounds 72.4m to pounds 42.3m, just a third of shareholders' funds.

Unfortunately, APV warns, that is as good as it is going to get for the next 18 months. A new competitor, Gea, has joined the battle to sell food processing machinery to hard pressed European manufacturers, pushing gross margins down by up to 3 percentage points - a significant drop given that it made just 0.5 per cent net on the business in 1993. It needs to take an axe to costs, requiring hefty provisions - pounds 30m is the City's best guess - and chunky redundancy provisions. The resulting full-year loss could knock more than a fifth off its net assets, pushing it close to a breach of banking covenants. Hence the need to save cash by cutting the dividend.

APV's portrayal of itself as a helpless victim of an irrational market does not stand up, however. Gea has been in the market for three years. APV has spent pounds 90m on restructuring in the past four years, shedding 4,000 jobs. There should be little fat left in the business after that. But cutting into the bone is likely to make it harder, rather than easier, to fight off competition.

The only consolation for shareholders is that the 35.5p fall in its share price to 83p leaves it worth just pounds 240m, pounds 110m less than at the beginning of the day. That might tempt Siebe to resurrect its interest, having failed to take it over eight years ago. Gea might even be tempted.

Those inclined to believe Clive Strowger, chief executive, when he says these measures should be enough to get it back to a respectable profit should remember his record at Mountleigh, where he was promising imminent recovery almost up to the day it went bust.