Bottom Line: Lucas: optimistic but vulnerable

SIR ANTHONY GILL, chairman and chief executive of Lucas Industries, is optimistic that the group will make enough profits to cover its dividend this year for the first time since 1991.

The problem is that he was equally optimistic last year but, despite pounds 60m of cost savings and pounds 7.7m profit on the sale of businesses, it still had to transfer pounds 25.1m of reserves to hold the payment at 7p.

Lucas is relaxed about that. Prospects are brighter, and the cash position means it can afford it. Shareholders might then ask why they are being forced to finance it through a mini-rights issue, otherwise known as an enhanced scrip dividend.

While that will save up to pounds 10m of advance corporation tax - albeit by costing its shareholders up to pounds 35m of income - Lucas will have to generate a 6 per cent return on the cash saved to avoid dilution. And the 4.4 per cent of new shares which it could have to issue will make a covered dividend all the harder to achieve.

Despite the dividend disappointment, yesterday's results were impressive. The pounds 60m of cost savings achieved in the first year of the restructuring programme emphasises how far Lucas' cost structure had got out of line with demand - the pity is it took the group so long to realise that. It hints that it expects savings in the current year to be at least as much again, making the dividend target a little less ambitious.

Much of the savings came through squeezing working capital, more than pounds 50m last year, and that is only 'scratching the surface', said John Grant, finance director. Those benefits were offset by the pounds 63m cash cost of the restructuring, although disposals generated a further pounds 56m. That helped to cut underlying gearing by almost five points, but currency movements meant the actual level rose slightly to 45 per cent.

Ambitious it still is, however. European car registrations in the first eight months of the year are 15.9 per cent down on last year and, while Germany may be falling less precipitously, France is taking over the momentum. That means profits in the automotive business - more than half the total - will, at best, be flat this year.

Recovery in the other businesses is also likely to be slow, while research and development spending could rise significantly as the amount recouped from customers falls below last year's abnormally high levels.

Even if it achieves the pounds 75m or so required to cover the dividend, the shares - up 12p at 167p yesterday - stand on an expensive 24 times earnings. That leaves them vulnerable to disappointment if George Simpson, seen as the miracle worker of the engineering sector, does not finally sign on the dotted line.