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August 3, 1987

ORIGINAL BUSINESSES DO WELL, BUT BLACK SPOTS IN ICL’s PERFORMANCE WORRY FANS OF STC

By CBR Staff Writer

STC Plc’s shares shed 9p to 308p early yesterday as the company failed to meet some of the more exotic half year forecasts that were floating around the City last week. Pre-tax profits for the six months to June 28 reached UKP77.2m, against UKP49.2m last time, and, despite the initial gloom, analysts are now looking for close on UKP200m for the whole year. Their optimism is in part based on the improving cash position, and the absence of further rationalisation costs on the horizon. But it is also based on a healthy order book and improving prospects for most of the company’s activities. Components and distribution are going well; defence, after a poor start to the year which led to a restructuring and a UKP2.4m write-off, is looking better thanks to UKP60m worth of advance orders, but it is still tiny, with half-year sales of only UKP31m, down from UKP43m last time. Submarine systems, which was unable to complete some projects in the first half, is close to finishing a major contract for the Indian navy and has been shortlisted for four others, all of which are UKP50m or more in size. Much of the improvement in submarine systems will not show through until 1988, but the rest of STC Telecommunications is already very buoyant. The division as a whole saw its operating profits zoom ahead in the first six months to UKP23.6m, from UKP9.9m, on turnover of UKP168m. Its highlights were the recent UKP6m order from British Telecom for the development of a new generation of cordless telephones and the appointment in May, by Telecom, as main contractor for the UKP40m second phase of the City Fibre Network. Transmission systems, which bypass local exchanges giving users faster data transmission, are emerging as a platform on which STC intends to build its long-awaiting convergence of computing and telecommunications. Convergence was the original reason given by STC for its purchase of ICL back in 1984, but until recently the concept seemed to be heading for an early death with many of the most obvious internal candidates for achieving convergence being sold off instead. The idea seems to have been resurrected recently, perhaps prompted by the promotion of ICL’s Peter Bonfield and Peter Gershon to important posts in the STC hierarchy. Already the transmission systems are performing ahead of expectations, although Bonfield, now STC deputy managing director in addition to his posts as ICL managing director and chairman, told the Sunday Telegraph that their real importance may not be seen for up to five years, at least to STC’s balance sheet. Despite the re-emergence of convergence as an issue, and the promotion of Bonfield and Gershon, all is not well at ICL. On the face of it the results were impressive enough – half time operating profits up 29% at UKP53m on turnover up 13% at UKP627m, and margins standing at 8.5% – but the business is failing to make the impact necessary on the continent. This has two effects. One is to increase ICL’s perception as an ‘English’, rather than a pan-European, company. The second, very related effect, is to reduce the potential foreign base on which the results of convergence – international networks and the like – can be easily launched in the years ahead. Increasing ICL’s isolation is the fact that the proprietary products – the Series 39 mainframes and the DRS300 distributed system – are doing well, but the Unix products – bought in from Computer Consoles Inc and Datamedia – are not. There is, however, little likelihood of ICL’s growth slowing at least in the immediate future. Recent City talk about STC has centred on what ITT Corp will do with its 24% stake. As a result, the rumours concerning a possible bid for Ferranti seemed to have been quietened. But, as Bonfield admitted to the Sunday Telegraph, STC is, for the first time in a long time, in a position to make an acquisition. The article said that ICL is strong in retailing, local government, health and manufacturing process control, but it was mistaken.

Ferranti

ICL is strong in the first three and in manufacturing systems – that is account

ing – but not in process control. What it lacks, despite a MAP network being installed in the Kidsgrove plant, is the sort of real-time capability that Ferranti has. The strong military side of Ferranti would plug perhaps the most glaring gap in the STC profile, while its telecommunications interests would be beneficial. With UKP80m in cash and a share price over 300p, compared with 98p barely a year ago, STC is getting close to being able to afford the UKP800m that Ferranti is likely to cost, or will be when the uncertainties over the ITT stake is cleared up. STC shares, as ITT has implied, are undervalued on the next few years’ prospects. UKP195m pre-tax for the year equates to a price-earnings ratio of 13.5.

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