Market Report: Talk of a Lucas rights issue depresses sector

FEARS that Lucas Industries may launch a rights issue along with full-year results on Monday depressed shares in the aerospace and motor components group. Lucas shares fell 11p to 171p at one stage, and closed at 177p.

The results for the year to July will be the first under the stewardship of George Simpson, who joined as chief executive earlier this year. Analysts expect him to bite the bullet and make a substantial restructuring provision.

There is a wide range of profit projections, from less than pounds 40m to as much as pounds 80m. Among the larger broking houses, BZW expects underlying profits of pounds 65m while NatWest Markets is at the top of the range at pounds 80m. Market opinion about the dividend is fairly well concentrated on a maintained payout.

NatWest anticipates 'significant exceptional' charges for litigation and damage settlements in the US aerospace operations and for further rationalisation and reorganisation.

However, NatWest added: 'What we don't need is for the latter provisions to be of a magnitude that implies that Lucas expects to raise relatively modest sums from the sale of non-core businesses and to incur a significant cash cost in carrying out the planned rationalisation.

'Bluntly speaking, the extent to which Lucas can afford to incur major restructuring costs is limited. Improvements must be achieved without there being a major cash flow.'

Investors believe that if Lucas does not throw the kitchen sink at the balance sheet then someone else might. Bid rumours have persisted for months. BZW believes that Lucas is worth 'far more to the right bidder' than its recent share price high of 240p.

The speculative list of suitors is long, and includes T&N, TI Group, Bosch and even BTR.

T&N shares, a sectoral neighbour of Lucas, were also depressed by rights issue rumours and slipped 2.5p to 209.5p. The gossip was that T&N could have to raise pounds 200m from shareholders if it was to forge ahead with a bid for Kolbenschmidt, a German maker of vehicle components.

Borrowings at T&N already represent 60 per cent of shareholders' funds. There are concerns that the enhanced scrip dividend may have to be scrapped because of the falling share price, which was recently as high as 242p. The cost of a straight cash dividend payment would be pounds 46m.

Overall, the market had a roller-coaster session. The FT-SE 100 index opened 12 points lower, climbed back to plus 11 at lunch, then dipped to an all-square position in mid-afternoon dealings and closed at 2,998.7, up 14.3.

Prices were initially depressed by further concerns about the possibility of higher interest rates in both Japan and the US. Those worries were allayed, however, by the release of lower than expected non-farms payroll data from the US.

While the data appeared to rule out an immediate rise in US interest rates, some economists said that an increase could happen next week when the latest inflation numbers are announced.

Neil MacKinnon, chief economist at Citibank, said: 'The Fed would be more likely to link any hike in rates on next week's inflation data.'

The volatility of leading share prices in London continued to mask the pitiful genuine trading taking place. Volume was less than 504 million shares at the close, and the number of bargains totalled just 20,000.

Few of the gains and losses among the leaders extended to double figures. And there was little hard corporate news, or firm trading to influence events.

BAT Industries shrugged off an early fall of 5p, caused by a report that smokers carried twice the risk of having cancer, and closed 5p better at 429p.

A weak opening by Argyll was overturned by news that it was selling 100 Lo-Cost stores for up to pounds 73m to Co-operative Retail Services. Argyll finished all- square at 265p.

The wave of electricity companies buying back their own shares rolled on. London Electricity bought 15.3 million at 672p each. Shares closed 2p down at 683p.

Other notable dealings involved Cowie Group, up 5p to 216p on a large agency cross of 1.1 million shares at 209p.

The award of radio licences in London lifted Chrysalis 7p to 213p, but Capital Radio eased 1p to 357p on concern of increased competition from Virgin, which finally gained access to an FM wavelength.

Telegraph shares were unsettled by Conrad Black's plans to buy 6.8 million at around the market price through his Hollinger company, which will see its stake rise from 57 per cent to 62 per cent. The shares were up 30p before the announcement, but closed at 330p, up 20p.

Share prices ended the week on firmer ground, aided by better- than-expected US employment data. The FT-SE 100 index came close to reclaiming 3,000 with a rise of 14.3 points to 2,998.7. Volume trading was low at fewer than 504 million shares.

Torquil Norman has cashed in on the roaring success of the Mighty Max and Polly Pocket miniature toys made by Bluebird, the company he chairs. He has sold almost half of his 2.1 million shares at 207p each to institutional investors. He has no plans to sell any more shares, which have risen by 32 times in value over the past four years to 213p, unchanged yesterday.

Shares in Leigh Interests, the waste management group, had a rough session. Smith New Court did the damage with a sharp profits downgrade. The broker's forecast for the current year has been cut by pounds 1.5m to pounds 11.5m and by a heavy pounds 5m to pounds 14m for next year. Recent results were well below expectations. The shares fell 7p to 195p, just 4p above the year's low recorded in January.