View from City Road: Slimmed-down BBA can wait

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BBA GROUP, the automotive component, industrial materials and aviation company, must be sick to death of saying so but it still cannot see any signs of a general recovery in demand in its markets. However, it expects great things from its slimmed-down cost base when an upturn eventually comes.

In view of the disinflationary grip being exerted by the exchange rate mechanism in Europe it may be wiser for the group not to hold its breath for an imminent recovery on this side of the Atlantic, particularly as German car sales are going into reverse.

But BBA's faith in its cost base is no idle boast. It pleasantly surprised the market yesterday with a better-than-expected 26 per cent rise in half-time pre-tax profits to pounds 33m. There was an underlying rise of 17 per cent excluding interest benefits from its 1990 rights issue and a further rise in exceptional redundancy and reorganisation costs from pounds 3.7m to pounds 4.8m. In response its shares rose 8p to 133p.

Trenchant cost-cutting in the past was the prime mover behind this performance. This was most evident in automotive components, where margins rose smartly from 3.7 per cent in the second half of last year to 6.4 per cent in the latest six months. The German after-market is providing overall growth and the US recovery has provided a 20 per cent sales increase. BBA is also scoring on new products where it can obtain real price increases and landing useful contracts such as Honda's new UK clutch business.

Industrial activities have almost clawed their way back from a dire second half. Heavy electrical engineering has sold its workload forward for the rest of the year while industrial textiles is receiving the cost- cutting treatment in a depressed market.

Aviation profits have suffered from the lack of high-margin luxury refurbishment work but there are signs of a mild pick-up.

Smaller landing-gear production is protected from cutbacks in large civil aircraft while airport services, enlarged by the acquisition of Butler Aviation in June, is viewed by BBA with great excitement.

Profits of pounds 60m will provide cover for a maintained dividend and leave BBA cash- neutral, before acquisitions, for the year. A yield of 7.5 per cent is therefore secure and more than GKN but any resumption of dividend growth is some way off.