Datacom duds overshadow Racal

As always, Racal's figures are a mixed bag in which good performances from a number of extremely promising businesses have been overshadowed by yet another dismal result from the company's data products division.

That is unfortunate, because it distracts attention from the company's undoubted entrepreneurial skills and the uncanny knack Sir Ernest Harrison has shown over the years for realising shareholder value.

The numbers themselves for the six months to September were in line with expectations - pre-tax profits of pounds 30.1m, up 28 per cent, and a nice 20 per cent rise in the interim payout to 2.1p - so yesterday's share price improvement, up 6p to 276p, was a reflection of the market's welcome for the acquisition of British Rail's in-house telecommunications supplier for pounds 133m.

Buying in profits of pounds 17.6m, the deal is expected to be earnings-enhancing from day one and dilutes the impact of struggling modems, credit card terminals and other computer peripherals on the dominant data communications division. Owning the network should open some useful doors in both Whitehall and the private sector.

That is just as well given the slump into losses of the division once the beneficial contribution of Racal's Camelot stake is stripped out.

Without Camelot, datacoms made a pounds 5m loss compared with an pounds 800,000 profit last year, itself a pathetic return on sales of almost pounds 200m.

The company makes two points, both of which carry some weight. First, Camelot is an integral part of the datacoms division - if it were not so high-profile, and the rest of the business so arcane to the average observer, no one would consider stripping it out in the first place.

Second, the division is showing every sign of having bottomed out - new management has an impressive track record in turning around other apparent basket cases.

But with no one claiming that break-even is any closer than 18 months away, data communication is still a heavy drag on the rest of Racal, itself something of a curate's egg.

Margins are under pressure at the biggest earner, Specialised Businesses, the up-front costs of trying to win the Government's Bowman radio contract are draining Radio Comms, and marine and energy work is highly competitive so Racal was more than usually dependent on an impressive 10 per cent return on sales from its defence companies.

Profits for the full year to March are now expected to reach pounds 73m compared with last year's pounds 58.3m, putting the shares on a prospective price/earnings ratio of 16. There is plenty of growth potential in Racal, but the shares have had a strong run over the past few years and, with an unexciting yield, they are high enough.