Bottom Line: ABB axe works

TRENCHANT restructuring at Asea Brown Boveri, the Swedish- Swiss electrical engineering giant, is paying off handsomely. Last year the group embarked on a dollars 596m ( pounds 390m) shake-up of its operations involving the closure of 15 plants across Europe and the axing of 7,000 jobs. Pre-tax profits in the first half of 1994 have duly risen by 22 per cent to dollars 608m. The driving force for this improvement was enhanced operating margins, stemming mainly from reduced labour costs.

First-half revenues were only slightly ahead at dollars 13.1bn, or up by 2 per cent in local currencies. Economic growth in North America, although good for standard products, particularly among automotive customers, has still not reached ABB's markets for large electrical and industrial systems.

Much the same was true for Nordic markets, while the UK and the rest of Western Europe have barely started to recover, a fact that is overshadowing fast growth in Asia and Eastern Europe.

Against this sluggish overall sales background, labour costs, more than a third of group sales, fell by more than 3 per cent, lifting ABB's operating profit margin from 7.2 to 8.5 per cent.

ABB has set itself a 10 per cent target for operating margins, which may be hit in 1996. So far this year orders received have risen 6 per cent in local currencies, implying a future pick-up in sales growth.

Morgan Stanley is forecasting an 18 per cent rise in pre-tax profits to pounds 1.41bn this year and an even stronger rise in 1995. This puts Asea and BBC shares on a prospective p/e of 14.

It is a more expensive rating than that of GEC, which is on a 1994/5 p/e of about 13. But the British company, which earns margins of just over 5 per cent in its Power Systems division, well below ABB, is not expected to grow earnings by much more than 7 per cent this year.

Such a pedestrian outlook, together with institutional rumblings, helped to give a touch of credence to idle takeover gossip yesterday that the venerable, conservatively accounted, cash-rich GEC may be a target for the larger, more highly-rated BTR.