Troubled US subsidiary leaves Senior exposed

A question mark hangs over the future of engineering group Senior after it announced that accounting irregularities at a US aerospace subsidiary Ketema would result in a big profits shortfall this year. Analysts believe the group is now vulnerable to a bid approach, a sentiment boosted by news that Senior has asked its financial adviser, […]

A question mark hangs over the future of engineering group Senior after it announced that accounting irregularities at a US aerospace subsidiary Ketema would result in a big profits shortfall this year.

Analysts believe the group is now vulnerable to a bid approach, a sentiment boosted by news that Senior has asked its financial adviser, Schroders, to carry out a review aimed at maximising shareholder value.

The firm said all options would be considered – a statement described by analysts as tantamount to inviting bids.

Senior said the accounting irregularities at Ketema, acquired in late 1997, would result in a £14-16.5m hit, of which £8-10.5m related to prior years. Profits this year are expected to be about £7m below forecast, £5m because of Ketema and £2m because trading is below expected levels.

Two Ketema directors directly responsible for the accounting irregularities have been dismissed. The US firm has also axed 48 jobs as an interim cost-cutting measure.

The irregularities, believed to concern the over-valuation of inventory and sales and profits on a large contract, were only discovered after the installation of a computerised accounting system.

Senior is likely to ask its auditors why the problems were not discovered earlier. Arthur Andersen signed off last year’s accounts at Ketema without spotting anything untoward. The firm, asked by Senior in November to investigate the problems at Ketema, was unable to comment publicly on the matter.

Senior, however, said a full investigation is continuing into the circumstances of the irregularities and any other steps deemed necessary would be taken.

A group spokesman added that the Ketema problem was a `one-off issue’, and that the subsidiary’s order book and prospects look strong.

The City took a different view, marking the company’s shares down 26% – a 23.5p fall to just 68p.

At that share price, Senior is valued at just £208m, compared with £418m this time last year. House broker ABN Amro has cut its full-year profit forecast from £47m to £40m. Other brokers are believed to be looking for profits in the region of £36-38m.

Last year Senior made a profit of £49.5m, but the group has struggled this year, despite offloading many of its general engineering activities to focus on high-tech flexible tubes for the aerospace industry.