View from City Road: GEC's future plans off the rails

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The Independent Online
LORD Weinstock must once more return to his drawing-board. His latest scheme for GEC, where he is managing director, was torn to shreds only hours after the company first outlined it. As a result, its future remains as clouded as ever.

When Norman Lamont, the Chancellor of the Exchequer, announced plans to allow the private sector to finance infrastructure projects in the Autumn Statement, Lord Weinstock saw a golden opportunity.

GEC wants to sell more trains to British Rail, but British Rail cannot afford them. GEC has more money than it knows what to do with - its cash pile grew to pounds 1.8bn in the first half - whereas British Rail has too little. The fit was perfect - GEC could help BR lease trains built by GEC. That way it would keep its factories full and use its cash.

Sadly, both InterCity and Network SouthEast say they could not afford the rental. Other users of GEC's money may yet emerge - the Jubilee Line is not a front-runner, the Heathrow Express may be - but the company's attempt to do something new got off to an unfortunate start.

Shareholders have been able to forget about GEC's problems in recent months, when its financial strength and consistency has stood it in good stead. Profits rose by pounds 10m to pounds 356m before tax in the six months to 30 September and should rise further in the second half, helped by earlier rationalisation - it lost 4,500 jobs in the first half - and sterling's devaluation. Reflecting this, its shares have outperformed the market by a third in the past 12 months.

But now investors are anticipating recovery, the old problems will come back to the fore. In the first half, GEC's investment in research and development fell from pounds 208m to pounds 184m, and net capital spending was down from pounds 96m to pounds 67m, which is only half the depreciation charge.

Defence - a shrinking business - continues to account for three-quarters of the important electronic systems division. And there are huge question marks over Al Yamamah - GEC makes avionics for Tornados - and the European Fighter Aircraft.

Last, but by no means least, is the question of a successor to Lord Weinstock, 68. Sir David Scholey's appointment to the board is unlikely to have brought much relief to shareholders on that point.

The shares, at 262p, down 10p, yield 5 per cent, which is not enough to justify chasing them. If experience is any guide, they will underperform as the recovery gets under way.

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