THE days, not so long ago, when British Aerospace regularly produced
unpalatable nasties for the market to digest look thankfully to be over.
But yesterday's first-half profit of #20m against the #129m loss for the
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same time last year was at the bottom end of market projections. And
along with net debt higher than expected at #721m against #257m at the
end of 1992, it left the shares 26p lower at 394p.
Even so, under new chairman John Cahill's management team, the group's
inevitably slow rehabilitation is definitely under way after last year's
#1000m write-offs for redundancies and restructuring of commercial
aircraft activities, including the transfer of the Advanced Turboprop
aircraft to Prestwick.
The emphasis of the still heavily defence-dominated group is on cost
reductions and cash generation and the increase in net debt during the
first half reflects a much reduced seasonal first half operating cash
outflow. BAe says that the second-half cash flow will include an
increased rate of expenditure to implement the regional aircraft
reorganisation which will be more than compensated for by the proceeds
from Corporate Jets which was sold for #250m. Operating cash flow,
meantime, will be positive.
In fact, BAe has made clear that it will put cash before profits and
also continue to get rid of underperforming non core assets even if they
have to be sold below book value. The group is also in talks to form
combinations in the turboprop plane and defence businesses, where in the
latter talks with GEC came to nought, and is seeking to sell Ballast
Nedam, its construction unit, and also some Arlington property
Rover Group, once touted as possibly being up for sale is enjoying a
new lease of life and is regarded as part of the group's vaunted core
activities. The resurgence in the motor industry has meant that Rover
has enjoyed good sales in the UK. But in addition, it is doing well in
Continental Europe against the trend where many markets fell sharply.
Rover increased its sales in Europe to 250,329 cars during the first
eight months from 221,361, boosting its market share from 2.3% to 3.1%.
First half losses have been reduced and demand for new Rover car
models and Range Rover and Discovery four-wheel drive vehicles has
enabled the company to make good progress in lowering distribution costs
through the reduction of wholesale vehicle stocks. UK sales through the
important August registration period held up well, and the company is
looking for a return to profitability in the second half.
Overall, though, the size of the task facing BAe can be gauged from
the fact that at present the only real substantial contributor to group
profits is the defence division, which benefits from a strong bias to
first-half contract deliveries, despite difficult trading conditions for
The outlook for defence has of course been significantly enhanced by
the confirmation of the additional Tornado jet fighter order for Saudi
Commercial aircraft losses mostly reflect the difficulties continuing
in the regional turboprop market, where there is considerable
overcapacity and ''disorderly marketing.'' Airbus made a small loss but
is getting better against a reduced production programme.
The financial structure of Avro International, BAe's joint venture
with Taiwan, was recently agreed, and the parties are now negotiating
technology and development issues. The go-ahead for this project is very
important for the future of the company's regional jets business.
Production of the Jetstream and the ATP turboprop aircraft is
concentrated at Prestwick. While Prestwick would not have been directly
affected if the Taiwanese deal had fallen through it would have had an
unsettling effect on the whole regional aircraft division. This would
have happened at a time when Jetstream orders have faced tough
competition and price cutting during the recession, raising fears of
possible redundancies at Prestwick.
The chairman is able to report that carrying costs of property
development were contained in a market showing some signs of
improvement, while the sale of The Forge retail development in Glasgow
will benefit second half cash flow.
BAe clearly still has a long haul ahead of it but the signs are
encouraging. The refinancing of the company with a #1500m five-year
syndicated facility has secured its future financing needs.
Gearing is currently standing at 41% but the aim would be to half this
by the year end. What is still sorely needed, and not just by BAe is a
big improvement in the trading background.
Meanwhile, shareholders are to receive an interim dividend of 3.3p
against 3p last time.