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

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

Royal Ordnance.

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.