Profits slump forces FKI to halve dividend payout

FKI shares fell sharply yesterday after the company halved its dividend payout, reported a steep decline in profits and warned that conditions would remain tough.

However, reporting full-year results, the company did announce that it had pulled off a new deal with its bankers, following concerns that it was close to breaching covenants on its debt. At the end of its financial year, net debt was £498m. A new arrangement with the banks, in place until September, is worth a further £80m and gives FKI "additional headroom against unforeseen circumstances".

John Nuttall, analyst at Investec, said: "This implies to me that the company is working hard on some asset disposals before the covenants revert back [in September]."

FKI reported that pre-tax profit fell to £79.2m, for the year to 31 March, from £135m last year. The company, which is undertaking a strategic review, has a diverse collection of 67 businesses, making everything from turbo generators to conveyor belts and door handles. The group had made a series of acquisitions just before markets turned down, leaving it with a relatively high debt but falling income.

FKI shares closed 13 per cent down at 77p, although Paul Heiden, chief executive since January, insisted the company had come "squarely in the middle" of profit forecasts, following a trading update in March. He said there was an element of profit-taking yesterday, as FKI shares had climbed in recent weeks from 57p.

The company's dividend was slashed by 55 per cent. Just 0.3p was added to the interim dividend of 4.2p, to give a payout for the year of 4.5p. Each 1p a share of dividend costs FKI £6m, so a cut was essential for the company to remain within the banking covenants. Mr Heiden said the dividend was in line with the fall in profits and the yield on FKI shares was still twice the average.

"The key issue is that, with the balance sheet tight, paying out the [same] dividend was not necessarily sensible. Paying out large dividends was counter to our debt [reduction] strategy ... Some shareholders will be disappointed, others will understand."

The company reported its pension deficit had ballooned to £126m at 31 March, from £12m a year earlier. That means FKI will have to increase pension contributions by £20m this year. Mr Heiden said the shortfall was "affordable" and pointed to its volatility - the deficit now stands at £105m.

Mr Heiden said there was no improvement evident in trading in any of FKI's markets. Analysts are forecasting that profits will be flat for the current financial year.