Pound’s potential victims named

Stockbroker rates the risk factor for engineering firms from sterling’s strength in the foreign exchanges

The pound’s strength since December has `derailed’ the engineering sector, warn analysts at stockbroker Credit Lyonnais Laing (CLL). It has assessed the currency exposure of the top 22 companies and listed them in three risk categories: high, medium, and lower.

Assessments assumed exchange rates of DM2.74 and $1.62 prevailing through 1997. The analysts’ figures took no account of any hedging already in place, particularly for long-term contracts.

The CLL chart shows what percentage of sales each player has in Continental Europe, estimates the extent of the currency `hit’, and its impact on profits.

Rated as high risk are British Steel, Vickers, Weir, and APV. Each sells a lot of its output overseas, so the strong pound makes its prices unattractive against those of local competitors. CLL saw the big danger here as loss of market share.

Around 50% of British Steel exports are affected by the sterling/Deutschmark exchange rate. This is also crucial to Weir, which has big pump sales in Germany.

Concern about Vickers relates mainly to exports of its high-margin Rolls-Royce and Bentley cars.

Medium-risk companies are those whose Continental Europe sales are mainly sourced from local production. Pricing, therefore, is not affected. The hit comes when profits are translated back to sterling.

In this category CLL lists BBA, GKN, IMI, Laird, LucasVarity, TI Group and T&N. None is a big UK exporter.

Lower risk are those with low exports to Continental Europe, and whose sales are mainly in the UK or sourced from production in the US or dollar-linked markets. The companies here are Cobham, FKI, Glynwed, Halma, Johnson Matthey, McKechnie, Morgan Crucible, Rolls-Royce, Siebe, and Smiths Industries.

The biggest company in the sector, British Aerospace, is also rated lower risk. Two-thirds of its sales are in defence and are sterling denominated. BAe’s civil sales – mainly Airbus – are known to be extensively hedged, and the company has confirmed that it is covered at a sterling exchange rate of $1.50 for this year, and for a proportion of sales after that.

CLL had British Steel and Vickers on its sell list. It rated the latter’s prospects lacklustre, with too much hope pinned on the new BMW-engined Rolls-Royce car. `It is by no means certain this will transform Vickers’ prospects,’ said CLL.

Its five buys were companies it believed would significantly outperform the stock market as a whole this year: BBA, FKI, IMI, Johnson Matthey, and Rolls-Royce.

The broker revised its 1996 forecast on IMI following the company’s decision to shut down its loss-making Yorkshire Alloys arm at a cost of 670 jobs and £25m in closure expenses. CLL’s new forecast was £179.5m pre-tax (£87.5m).

{{Vulnerability of top engineering companies

Company % sales in £m potential losses Pre-tax profit Continental Europe DM2.74 & $1.62 at risk

APV 32 1.5 7.5BBA 36 11.0 7.3BAe 23 15.0 3.3British Steel 38 80.0 20.0Cobham 18 1.8 4.2FKI 16 4.0 3.3GKN 39 23.0 6.6Glynwed 17 2.7 2.9Halma 23 1.3 3.3IMI 32 9.0 6.6Johnson Matthey 15 4.8 3.6Laird 48 6.0 8.3LucasVarity 32 22.0 6.3McKechnie 15 1.6 3.1Morgan Crucible 25 6.2 5.3Rolls-Royce 16 8.0 3.5Siebe 26 25.0 5.2Smiths Industries 18 7.2 4.3TI Group 32 13.0 6.2T&N 44 14.0 7.0Vickers 17 2.7 3.2Weir 9 1.0 2.4}}