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December 2, 1993

RACAL SHOCKS THE MARKET WITH UKP388,000 FIRST HALF LOSS AFTER ITS MAJOR BUSINESSES FAIL TO PERFORM

By CBR Staff Writer

Six months ago, Racal Electronic Plc managed to wrong-foot analysts by announcing year-end results substantially better than expected. Now it has managed to wrong-foot them again, with a pretty dreadful set of figures. Immediately following yesterday’s announcement of pre-tax losses for the half year of UKP388,000, its shares plunged by 28 pence to 160 pence. Last year it made a UKP23m profit. The loss was attributed to a hefty but expected UKP25m hit from discontinued operations, which coincided with an unexpectedly poor turnover from its Radio Communications arm. The company attempted to put a gloss on matters by predicting a substantial turn-around in the second half and final-year operating profits comparable to last year’s. Total operating profit from Racal’s continuing businesses fall by 3.5% to UKP23m following redundancy and reorganisation costs. Radio Communications, manufacturer of military tactical radio, saw its half-year profits slip to UKP7.9m from UKP12.5m on turnover down to UKP62m from UKP78m. The middle East has traditionally been a stronghold for this division, but, it seems, following the Gulf War that some of Racal’s traditional customers have felt honour-bound to spread orders among other Desert Stormers. A few weeks ago, for example Thomson-CSF SA of France won a large Abu Dhabi contract that Racal thought it had in the bag. The company is now attempting – successfully, it says – to build up orders in other regions, such as the Americas. Though Communications was the worst performer, profits fell across the whole company, except for the Specialised Businesses division – a catch-all which includes everything from the Racal-Redac engineering arm, to its health and safety and recording equipment operations. Data Communications saw operating profits drop 32% to UKP2.9m, though turnover grew marginally. Data Communications chief executive Tim Holley said that the recession in Germany, France and Italy had hit performance, while in the US it had taken longer than anticipated to move its product-line from older, less interesting offerings such as leased-line modems to the newer, sexier local network-linking products. In addition to the product changes, the company has just appointed 30 value-added resellers in the US, to supplement its traditional direct sales force. Holley says that as the business becomes more of a commodity, an increasing number of the data communication boxes will be shifted as stand-alone products through these resellers, rather than sold as part of any systems integration project and should help improve matters in the second half. In Europe, he hopes to see improved figures through sales of high-speed modems once production begins to ramp up and in the UK he expects a boost through new connections to the Racal-run Government Data Network. The network is proving popular with businesses as well as Whitehall mandarins, due to the system’s resilience, Holley says. It now has 150,000 users and had a record number of new connections during the last quarter. Services accounts for around 35% of Data Communications’ turnover, about half of which comes from the Government Data Network.

Expanding across the channel

The network has also begun expanding across the Channel with access nodes in Belgium, Paris and Brussels. As already mentioned, the second contributor to the company’s woes is closing of a couple of businesses. The bigger of these is the computer aided engineering operation that was part of the loss-making Racal-Redac. In October Racal sold much of Redac to Viewlogic Systems Inc, of Marlborough, Massachusetts (CI No 2,276) and other parts were shut down. This closure and disposal eventually cost UKP6.3m, on top of which the business made an operating loss of UKP4.9m. An additional UKP13.9m of goodwill contributes to the final UKP25.1m – however since this goodwill has been written off in previous years, the company will be crediting this UKP13.9m to its reserves. The other operation to go was the Spanish HRM Marine activity which was closed in the summer of 1992. Company chairman

Sir Ernest Harrison was keeping a stiff upper lip – the disposal of the loss-making parts of Redac should be seen by the City a sensible move, he said, despite the short term pain involved. The company says that it expects better performance from the Data and Radio Communications in the second half, but these will be offset by the need for increased expenditure on the British Army’s Bowman project and its National Lottery bid. The company is paying an interim dividend 1.5 pence, the same as last year’s. Analysts were saying that if the figures were weak, Racal would again look like a sitting duck bid target; in the event they were worse than weak.

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