Drax deal pushes Babcock into red

BABCOCK International, the troubled engineering group chaired by Lord King, sank pounds 9.2m into the red after heavy provisions against its Drax power station contract and closure of South African mining activities.

Yesterday's interim loss and pounds 21m of provisions were signposted with a warning by the company in September, but Lord King again said that economic conditions were very tough.

There was no repeat of September's free-fall in shares, and Babcock ended the day at 26.25p, down from 28.75p. The interim dividend was passed.

Provisions on Drax, Europe's largest power station, where Babcock has a pounds 400m contract to build a desulphurisation plant to clean up emissions, were pounds 15m.

A fundamental review of the Drax contract has been completed and the company says there are no more horrors to come. Lord King said Babcock was on schedule to complete the first two sulphur towers next month. Work on the remaining four towers should be complete by the spring of 1996.

The pounds 6m provisions for the closure by the end of this year of the non-profitable mining operations in South Africa follows pounds 4m of provisions taken in last year's accounts.

The provisions will be offset against tax, but will displace the ACT already paid and relieved against corporation tax. Because of this, the tax charge for the half-year is pounds 2.6m higher.

The division managing the Rosyth dockyard at Fife improved its performance, but was hard hit by the loss of the nuclear submarine refit programme. Babcock said it would still bid to buy the dockyard, subject to a satisfactory order book and certain undertakings from the Ministry of Defence.

Other businesses performed well, but Lord King warned: 'Bearing in mind uncertainties in predicting the outcome of long-term contracts, such as Drax, the board recognises the need to exercise caution in anticipating the rate at which profitability can be rebuilt.'

Before September's warning, the City was forecasting profits of around pounds 6m this year and up to pounds 35m next. Analysts now expect about pounds 3m this year and pounds 14m next. One said that yesterday's figures were on the high side. But he believed confidence in the group had been strengthened following a management shake-up, which included the appointment of Dr John Parker as chief executive and Nick Salmon as group managing director.

Turnover was up from pounds 399m to pounds 413m, and net borrowings stood at pounds 10m. The loss per share was 1.77p.