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June 23, 1987

RACAL POISED FOR TAKE-OFF IN 1987-88

By CBR Staff Writer

The oil price slump had a major impact on Racal Electronics Plc’s results, reported yesterday, with both the Radio Communications and the Marine & Energy operating companies adversely affected by delays in orders from members of the Organisation of Petroleum Exporting Countries and the lack of new ships. Radio made just UKP6.7m in 1986-87, against UKP36.8m in 1985-86, while Marine & Energy turned a UKP4.6m profit into a UKP5m loss. But, despite the problems, the group produced pre-tax profits up 11.1% at UKP100.3m on turnover up just 1.9% at UKP1,290m. And, at a very bullish presentation to the City and the press, deputy chief executive David Elsbury stated that the prospects for the current year are VERY GOOD – his capitals – and said the group was entering a new period of sustained growth. Judging by the figures and forecasts Elsbury gave out at the meeting, Racal is looking to up its trading profits by around 40% to just under UKP175m this year. Leading the growth will be security products, mainly through Racal-Chubb, and telecommunications. The latter, which made UKP10.2m on turnover doubled to UKP68.7m, against a loss last time of UKP12.3m, is projected to produce UKP30m this year even after a UKP45m investment in value added network services, new radio paging and private mobile radio services, both of which start later this year, and the Orbitel digital cellular radio joint venture with Plessey. In 1986-87, there were 50,000 new Vodafone subscribers and another 60,000 are expected to join this year.

Bad debt control

The current total is just short of 95,000 – well ahead of the forecasts made at the interim stage. Bad debt control has become far tougher than it was when the cellular mobile telephone service started, and Racal believes that its competition has higher rates of churn; Racal loses 13% to 14% of subscribers at renewal, and reckons that the British Telecom-Securicor Cellnet loses rather more. In security, Racal Guardata and Racal Transcom both performed well and have moved into profit, while the safe, lock, alarm and fire extinguisher parts of Racal Chubb also showed growth, helped in particular by 13 acquisitions on the alarms side. Data communications, which like Defence Radar & Avionics is not expected to up its profit contribution in 1987- 88, had an outstanding year in 1986-87 with profits nearly tripling to UKP44m helped by a substantial reduction in the cost base in the US at Racal Milgo and Racal Vodac. During the year, it increased its expenditure on research and development on network management systems and will shortly be introducing a replacement – Sunrise – for the ageing CMS. With the oil price per barrel extremely stable – it has not moved outside $18 to $18.50 since January – and with the continuing efforts of Racal to reduce the radio communications side’s dependence on the Middle East started to bear fruit, Racal looks set fair for the next few years. Even a further slow up in the UK defence procurement in the new cost-cutting climate, is unlikely to push the company too far off its stated course, although the problems are perhaps greater than Elsbury admitted. Interest payments are expected to drop substantially during the year. Assuming a 35% tax charge, Racal, with an operating profit of UKP174m, is looking at earnings per share for the current year of around 16p. At its closing price last night of 268p, up 17p on the day, Racal, on its own figures, was on a prospective price-earnings multiple of 16.7 – quite cheap till you remember that the company’s forecasts have been wrong before. Still, it looks a buy.

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