View from City Road: Lucas holds up and shells out

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The Independent Online
The good news is that the reduction in the rate of advance corporation tax saved Lucas Industries pounds 600,000 in the six months to January. The bad news is that holding the dividend at 2.1p meant it still had to shell out pounds 4.3m, accounting for half its tax bill and pushing the rate up to a crippling 170 per cent.

Such is Lucas's commitment to a held dividend that the City has switched from betting on a cut to calculating the odds on it fulfilling its promise that it will be covered by earnings this year. Sir Anthony Gill, chairman, brought the winning post slightly closer by admitting that profits on disposals will count towards this target. But even factoring in estimated gains of pounds 10m, it is far from certain that it can come up with the pounds 70m needed.

Profits in the first half rose from pounds 200,000 to pounds 5.2m, thanks to the benefits of its rather belated cost-reduction programme. Without the pounds 20m saved by that programme so far, a pounds 4.1m one-off gain from unwinding an interest-rate swap, and a pounds 12m drop in redundancy costs charged against profits, the underlying deterioration in trading would have been painful.

The worry is that the deterioration will continue, despite Lucas's claims to have scented a hesitant recovery here and in the US. John Grant, finance director, says rationalisation benefits will be 'significantly' higher in the second half. They will have to be to compensate for a likely 20 per cent fall in German automotive demand - contributing to a 9 per cent drop in Europe overall - and flat aerospace demand.

The impact of devaluation on its borrowings means its year-end gearing target has risen from 40 to 45 per cent, compared with 44 per cent last July. But a pounds 52m cash outflow on the restructuring programme, and the pounds 65m outflow from a maintained dividend, including ACT - only partially offset by pounds 75m from disposals - make this almost as challenging as meeting its profit objectives.

The more generous analysts are predicting pounds 100m profit for 1994, putting its shares, up 2p at 139p yesterday, on a multiple of 14.6 and a 6.3 per cent yield, which is as secure as Sir Anthony's resolve. Persistent bid rumours should keep the shares up there.