Trafalgar comeback fails to impress market: Shares slip as interim profits fall short of analysts' forecasts

TRAFALGAR House, owner of Cunard, the Ritz and John Brown Engineering, has reported its first profit for three years. The pounds 13.4m earned at the interim stage was less than the market had expected and the shares fell 9p to 86p.

Allan Gormly, Trafalgar's chief executive, said the market had failed to appreciate how difficult trading was in the engineering division and had over-estimated the effect on the interest bill of the pounds 404m rights issue in December.

The group has pounds 250m of long- term debt carrying interest at 10 per cent which would be expensive to repay, while the rights issue proceeds earn just 5 per cent. Instead of repaying, it is aiming to invest the rights money to produce a return higher than 5 per cent.

This includes a pounds 50m programme to upgrade the QEII and the Vistafjord, two of the Cunard shipping fleet, this autumn. It also intends to add to its fleets by acquisition or joint venture.

It has added pounds 20m to its housing land bank, giving enough for about three years' sales. Mr Gormly expects profits from housing and commercial property to recover gradually.

The pounds 13.4m profit for the six months to March compared with a pounds 98.6m loss last time. The previous year's loss was due to pounds 112m of exceptional costs, including a write-down of the property portfolio. Underlying profits were only pounds 1.8m ahead.

A lack of large capital projects, because of recession in many parts of the world, meant engineering profits dropped sharply, although the construction division is seeing an improvement in British profits. That was not enough to prevent a halving of profits from the two combined businesses to pounds 13.5m.

The downturn in engineering meant 600 jobs were cut, costing 'a couple of million pounds', Mr Gormly said. There are likely to be further losses among the 22,000 employees in the second half, but he could not say how many. The order book was maintained at pounds 3.4bn, of which pounds 2.2bn relates to engineering, but the business is unevenly spread.

The shipping business continues to suffer from the recession and its outdated fleet, but occupancy at the Ritz hotel improved and the division increased profits from pounds 200,000 to pounds 1.1m. In property and housing, profits rose pounds 4m to pounds 4.2m.

Interest payable dropped from pounds 23m to pounds 14.9m, reflecting the benefits of the rights issue - the second in less than a year. That left the group with pounds 67.3m of cash, compared with pounds 336.9m of borrowings.

Earnings per share were 0.4p, compared with a 18.2p loss, but there is no interim dividend. The group is committed to paying 1p for the year.