The engineering sector is failing to generate enough cash cyclically to finance growth and sustain dividends, claims stockbroker Panmure Gordon.
In a survey of 22 leading UK engineers, the broker found only three that do so consistently – FKI, Siebe, and Smiths Industries.
Set to join this `virtuous circle’ of tight cash management are Powerscreen, Morgan Crucible, and BBA – the latter `transformed’ since chief executive Roberto Quarta arrived, says the broker which names BBA and FKI its top buys for 1997.
Taking as its measure free cash flow – the amount left after all on-going costs of the business have been met – as a percentage of pre-tax profits, Panmure contends that a minimum 20% is required to meet the criteria. This `provides scope for a company to expand, invest in existing businesses to enhance market share, sustain a good dividend, and to control its own destiny,’ said the broker.
In 1994-96, the free cash flow average of the 22 companies was 18.8%, with eight topping the 20% minimum. It projects a sector average in 1996-99 of 16.9%.
Powerscreen tops the broker’s current free cash flow chart, followed by FKI. At Rolls-Royce and British Steel, while returns on capital are improving, the firms `fall well short of acceptable levels’ through a cycle.