View from City Road: Dowty proves no bargain for TI

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The Independent Online
THE ENGINEER TI Group took a calculated risk yesterday in telling the stock market it had not hit upon a hidden bargain in its pounds 500m acquisition of Dowty in June.

Not only were Dowty's pre-tax profits to 31 March nearer pounds 26m than the pounds 32.7m unaudited 'estimate' issued by Dowty during the bid, if you apply unusually tough auditing standards, but indications of a stronger first quarter were also mistaken.

The short-term price paid by TI was a near-10 per cent fall in its share price as analysts cut forecasts of pre-tax profits to around pounds 115m this year and between pounds 150m and pounds 165m in 1993, implying little or no earnings growth compared with 1990.

TI needs roughly to double Dowty's profitability by the end of 1993 to justify its forecast of no dilution in earnings by then.

It is off to a flying start with the closure last month of the Cognito radio project, which will eliminate several millions of losses and interest earnings on the pounds 50m sale of the rest of Dowty's barely profitable information technology division.

TI is acutely sensitive to accusations of past accounting skulduggery with acquisitions and will not be revealing its fair value provisions against Dowty until October in order to get the numbers exactly right.

It may not be a terrific beginning, though, to treat pounds 25m of Cognito book losses and closure costs as pre-acquisition items, although similar treatment of a pounds 3.1m loss on closing out foreign exchange exposures is much less arguable.

Overheads are being cut everywhere in Dowty, but direct cuts in the labour force will be 'relatively modest'. In flat markets this leaves a challenge for TI's management expertise, although it is worth remembering that when the going was good Dowty's core aerospace and polymer divisions made combined operating profits of pounds 60m.

A 7.4 per cent fall in TI's interim pre-tax profits to pounds 50.2m, with a 6 per cent dividend increase, reflects a severe setback in soon- to-be-disbanded specialised engineering, not quite offset by modest if noteworthy underlying growth in seals and tube with a sizeable leg-up from recent acquisitions.

A p/e of 15, falling to 12 or 13 in 1993, includes the price of TI's FT-SE entrance in September and will limit enthusiasm until markets really revive.

(Photograph omitted)