View from City Road: Lucas looks over its shoulder

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The Independent Online
THAT strain again] It had a dying fall. First Hawker Siddeley, then Dowty and now Lucas Industries? In the first two cases poor results and warnings of tough times in the immediate future, accompanied by a restructuring plan to include the disposal of non-core businesses, were followed by bids.

Few in the City yesterday failed to spot an analogy between Lucas's combined pounds 88.4m restructuring plan and pounds 100m target for the sale of peripheral businesses and the subsequent fate of those two other revered names in UK engineering, which were swallowed up by BTR and TI Group respectively.

Eyebrows were also raised at the company's declared aim of generating enough profits in 1992/3 to cover its 7p dividend, which was paid entirely from reserves last year. It looked to some like a premature defence document.

Lucas is indicating that pre-tax profits - pounds 24m in the second half of the year to 31 July - are expected to slump back to break-even in the first half of this year because of production shortfalls in automotive components. But full dividend cover implies a sharp second-half recovery indeed to take full-year profits up to the required pounds 70m.

Lucas is talking of a noticeable upturn in spares orders for aerospace, after a dire second half hit by order cancellations and a pounds 12m provision against warranties and stocks, to their highest level for two years.

While diesel injection systems continue to make more than adequate progress in a declining car market, the recently beleaguered foundation brakes operations have apparently looked up again.

Since we are only in October will these signs of life be enough to produce the goods? Probably not, but then Lucas must also be expecting some rapid cost savings from the pounds 40m worth of proposed restructuring redundancies and some book profits on disposals.

It is encouraging that, after an underlying cash outflow of pounds 92m last year, finance has now become an executive rather than bean- counting function.

A yield of 10 per cent at 94p, up 4p, suggests that the stock market is not betting strongly on a bid but it remains justifiably worried about the dividend. But the fact remains that the likes of TI, let alone BTR, would regard Lucas's operating margins of 3.6 per cent as very poor. No wonder Lucas's management are looking over their shoulders. Any false move could be their last.

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