View from City Road: T&N out of step with the City

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IT SAYS something about T&N's vastly improved competitiveness that once proudly independent German car component makers are now willing to approach the company with a view to being taken over. It also points to a sense of confidence in T&N about its marketplace, which is not wholly shared in the City.

Discussions are under way with one German outfit that could result in a pounds 100m agreed deal in the next few months. Colin Hope, chairman and chief executive, assured investors yesterday that any price agreed would not dilute earnings even if it did not enhance them for a couple of years.

Gearing, 32 per cent at the end of 1991, would rise to more than 50 per cent if the purchase was financed by borrowings. Having tapped shareholders twice in the past two years for a total pounds 246m, it will be interesting to see if Mr Hope's considerable powers of persuasion are needed again.

His case would be helped by a better-than-expected 70 per cent recovery in half-time pre-tax profits to pounds 34.7m. The results pushed T&N shares 9p higher to 136p.

Past cost-cutting, together with impressive share gains at the expense of the Germans in a depressed market for both friction materials and pistons, pushed operating margins up from 7.1 to 8.4 per cent. Redundancy and rationalisation costs were pounds 1.1m lower at pounds 5.7m.

About pounds 34m was pulled out of working capital and cash neutrality is the aim for the year. This will take account of maintained spending of pounds 110m on investment and R&D and an unchanged total dividend of 10.85p. The interim payout is 3.6p.

Mr Hope is committed to paying that total although it is unlikely to be covered by earnings, for the second year running.

It is by no means certain that it will earn enough in 1993 either, unless the UK proportion of profits jumps to reduce a fiendishly high tax rate, currently 47.5 per cent.

County NatWest now expects pre-tax profits to be pounds 63m this year and only pounds 70m next because of a 2.75 per cent fall in West European car production in 1993. It boldly decided yesterday that T&N will be forced to cut the dividend in 1993.

A yield of 10.6 per cent reflects the market's worries, discounting a small cut. On that basis the downside must be limited.