By Hugh Sharpe
Shares in Vickers have been downgraded on a forecast of flat prospects for its defence and automotive businesses.
Stockbroker Charterhouse Tilney said shares are over-priced: it advised clients to sell and argued that the `correct’ value is 13 times prospective earnings – around 214p.
Vickers still awaits British Army approval of its Challenger 2 tank. Until then overseas orders for the vehicle – which provide higher margins than Ministry of Defence business -will be deferred, said the broker.
It is hoped the tank will pass its final Army tests next November.
Like others in the City, Charterhouse reckons Europe has too many armoured vehicle makers. But mergers among UK firms such as GKN and Alvis are unlikely until orders are placed for the Tracer renaissance vehicle and the multi-role armoured vehicle.
Charterhouse also said sales of existing Rolls-Royce/Bentley cars will be subdued ahead of the new model range.
While Vickers’ £83m pre-tax profits for 1996 were 6% up on the year before, it disappointed the City, as did chairman Sir Richard Lloyd’s cautious comments on the firm’s future.
Charterhouse promptly cut its previous 1997 pre-tax estimate by £5m to £88.5m, and its 1998 figure by £12m to £96m. For this year it has revised its dividend forecast down from 9.4p to 7.9p (7.2p) and its earnings expectation from 17.7p to 16.5p (16.7p).
Profits on automotive sales fell 10% to £37.4m on sales up 4% at £418.5m. Rolls-Royce’s margins slimmed on `a less rich’ model mix. Propulsion technology (marine and aerospace) was a strong performer, with profits soaring 40% to £24m on sales up 23% at £294.4m.
In defence, profits rose 13% to £18m, but sales were down 2.5% to £45.2m, reflecting the end of some overseas contracts.
Medical products recovered to show overall profits of £1.6m. Charterhouse sees this division as the odd man out.