YOU CANNOT have high gearing and an uncovered dividend at the same time, opined Sir David Lees, chairman of GKN, yesterday.
'It is not viable to supply European automotive customers from a UK base,' he added for good measure. Someone should tell Sir Colin Hope, Sir David's counterpart at T&N.
The two, largely automotive component engineering companies, have both cut costs severely to meet downward real price pressures from their big car manufacturing customers. They reaped the benefits in 1992 as profits pulled out of a three-year nosedive.
On an FRS3 basis pre-tax profits at GKN, helped partly by the absence of large closure costs, jumped from pounds 68.7m to pounds 121.8m in 1992. T&N's profits similarly bounced up from pounds 40.4m to pounds 63m.
Both, despite a further nasty bite from unrelieved ACT, held their dividends.
But while GKN made enough earnings, if you exclude exceptional items, to cover a 20.5p dividend, T&N, with earnings of 6p, was well shy of covering its 10.85p payment for the second year running.
GKN generated another sizeable cash inflow of pounds 51m and cut its gearing from 26.4 to 23.3 per cent despite a pounds 28m burden on the translation of currency borrowings.
A much more profligate T&N had to borrow pounds 36m to meet the pounds 47m cost of its dividend. Its capital spending ran well ahead of depreciation and nothing was taken out of working capital.
Adverse currency debt translation weighed in to contribute half of a jump in gearing from 31 to 45 per cent. No wonder some suspect that a probable placing to help pay for its pounds 104m Goetze acquisition in Germany may be a prelude to further fund- raising.
For both companies, apart from a continuing boost from lower head-counts, further profits progress will depend on just how quickly the US and UK markets pick up and just how badly the German market falls away.
Unlike GKN, T&N exports 50 per cent of its output from a highly competitive UK base and will be able to enjoy some limited devaluation benefits, car makers allowing, from sterling's fall. T&N, which may be hard-pushed to make the pounds 80m necessary to cover its dividend in 1993, is yielding 7.7 per cent at 187p, up 2p, and GKN, intent on rebuilding cover, yields 5.6 per cent at 485p.
The uncertainty over Germany could further dampen enthusiasm for either share.
Yesterday's View from City Road should have quoted Sir David Lees, chairman and chief executive, as saying that, having located close to its customers it was not viable for GKN to close down plants in Germany and supply its German customers from a UK base - not, as reported, that it was not viable to supply European automotive customers from a UK base.
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