View from City Road: Morgan gets a cool reception

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ALTHOUGH 50 per cent of Morgan Crucible's profits come from the US, its shares, up 4p at 248p, did not join to the same extent in the enthusiasm for dollar-oriented stocks yesterday.

The truth is, the City does not warm easily to Morgan Crucible, despite its price- leading positions and nimbleness in cost- cutting, mainly because of its penchant for rights issues, having raised pounds 174m in two years for largely unspecified acquisitions.

From a low point in July 1991 in the wake of its last pounds 95m capital raising - it still has pounds 25m left unspent - Morgan shares have outperformed the market by 15 per cent but have recovered in the process only half the ground lost since early 1989.

Admittedly, half-year results yesterday had some drawbacks. Reported pre-tax profits are 9 per cent up at pounds 31m but earnings per share are down by 8 per cent at 9.4p and the interim dividend is unchanged at 5.75p. There was a pounds 39m cash outflow during the first half, taking gearing from 23 per cent to 41 per cent as capital spending remained high and Morgan worked its way through its rights issue proceeds.

As previously robust margins fell by a full point to 10.5 per cent, operating profits were slightly lower at pounds 35.2m despite a pounds 3.8m contribution from acquisitions, which indicates an underlying 9 per cent fall after a pounds 1.5m adverse currency impact. Morgan has assumed a weak dollar for the year, which may well be too gloomy.

Profits in carbon fell by pounds 1.3m to pounds 8m as increased low-margin auto demand failed to offset decline in high-margin specialist products. Thermal ceramics were also hit by reduced demand for ferrous melting, while specialty materials, helped by a revived Holt Lloyd, which could fetch pounds 50m in a disposal against group debt of pounds 100m, held its own. Acquisitions accounted for a pounds 2.4m rise in technical ceramic profits. The second-half earnings performance will look better as the recent string of non-dilutive acquisitions comes into balance with issued share capital. Given pre-tax profits of pounds 70m and a possible 5 per cent rise in the final dividend, a p/e of 12 and yield of 7 per cent look attractive.