Lucas starts to deliver

THE INVESTMENT COLUMN

The arrival of George Simpson, a down-to-earth Scot, at the helm of Lucas Industries holds out the prospect of the car parts group's promise at long last being fulfilled. The doubling of pre-tax profits in the half year to January from £20.1m to £44.5m surprised no-one in view of last year's massive £87.6m restructuring charge.

But Mr Simpson's belief that Lucas is now "on track to delivering the sustained recovery in performance promised last year" had an unaccustomed ring of authenticity. Now the car market is starting to rev again, the core automotive business more than doubled operating profits from £27m to £56m, on the back of a 20 per cent rise in turnover to £1bn.

The group had a leg-up from the market, but that should not detract from market share gains and some useful new business. Top of that list is the £1bn order unveiled earlier this month to supply advanced diesel fuel injection systems to Volkswagen.

The immediate future looks secure, with further rationalisation benefits still to feed through and Lake Center Industries, the US auto electrics business acquired last October, performing better than expected.

More problematic is aerospace, which is operating in the most savage market since the Second World War. Operating profits barely edged ahead from £8.9m to £9m in the half year, on turnover down 7 per cent to £234m. Maintaining its contribution was impressive, however, and Mr Simpson has no illusions about the substantial work needed over the next 12 to 18 months to knock it into shape. Ambitions to use aerospace as a counterpoint to the automotive cycle, earning double the margins, sound more realistic coming from Mr Simpson than some of his predecessors.

The black spot remains Lucas Western's Geared Systems Division, where the company's legal battle with the US Department of Defense has already cost $18.5m in fines. Losses this year are likely to more than halve to below £10m, but further bad publicity may be generated. Lucas says its current provisions are sufficient to cover future outcomes.

Mr Simpson clearly has a sporting chance of reaching his aim of at least doubling the company's margin to 8 per cent and raising return on capital from 9 per cent to more than 20 per cent. Shareholders may have to wait a while longer to share in the fruits of his efforts. The dividend looks set to be held at 7p again this year while cover is rebuilt.

With brokers looking for full year profits between £130m and £140m, the shares at 197p, down 1p, still look fully valued on a prospective price/earnings ratio of nearly 19. Mr Simpson still has work to do to achieve a fundamental rerating of the company's prospects.