View from City Road: No fireworks from BBA

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The Independent Online
WHAT the stock market was looking for from BBA Group yesterday was a maintained dividend and some reassurance that the forecast fall this year in the previously booming German automotive market, a significant customer for BBA, would not deal the company a body blow in 1993.

To some extent it got both. Although FRS3 earnings, after a 53 per cent rise in pre-tax profits to pounds 47.4m inspired by cost-cutting and lower exceptional items, failed to cover the 7.5p dividend, it was held.

Despite internal BBA forecasts of a 15 per cent drop in German car production in 1993, the group views the future calmly. Half its output goes to the higher-margin after-market for components, which is firm enough, and downward pressure on original equipment sales could be offset by increased market share.

The bright spots include clear evidence that pounds 20m of redundancy costs in the past three years were not wasted. Operating margins in automotive were 1.7 points higher at 6.1 per cent with a sharp rise in UK profitability despite a flat market.

Duralay carpeting continued to find new customers while Trench Electric and Ajax Magnethermic did very well in North America and will contribute useful exchange rate gains in 1993. Aviation partly disappointed as Page Avjet avoided maintenance contracts with doubtful US carriers and, despite a solid performance by BBA's niche undercarriage companies, divisional profits dropped from pounds 14.1m to pounds 10.7m.

A jump in gearing from 41 per cent to 61 per cent was not heartening in view of the maintained dividend. But 10 points of this was on exchange-rate translation of dollar debt and a one-off payment on a past acquisition accounted for much of the rest.

Belatedly BBA has swapped pounds 100m of its previously matched dollar debt into sterling since it expects the US currency to rise against the pound. Shareholders can only hope the board is right.

Most expect clean pre-tax profits to rise by 10 per cent or more this year to about pounds 67m as the US and a more efficient UK offset the pressure from Europe. A p/e of 17.5 and a yield of 5.8 per cent is a recovery rating but, with little prospect of dividend growth for a year or two, sustained outperformance is unlikely.