Powerscreen moves back into land of the living

Winning Wealth From the Earth declares the out-of-favour Northern Ireland engineering company, Powerscreen, in its marketing-coloured site on the Internet. A few months ago it was almost buried in a welter of debris, consisting of debt, accounting errors and a probe by the British Serious Fraud Office.Its annual report, published last week, shows it has moved out of the living-dead category. Provided there are no more skeletons in the closet, it should have a future.

Powerscreen also boasted it is the "world's largest designer, manufacturer and distributor of portable screening and washing equipment, used in the materials, processing industries". That colourful site, however, has a significant omission, one which it will have to plug if it is to add substance to that long-winded claim. Surprisingly, that site does not publish its latest accounts. In contrast, CRH and other similar companies in the pursuit of transparency, give their results in full.

The annual report itself does appear to be transparent. Of particular relevance is the reference to the former executive directors, Mr Shay McKeown (chief executive), Mr Barry McCosgrove (finance director) and Mr Patrick Dooey (sales and marketing director), who each received £285,000 sterling in performance related bonuses. These were paid earlier this year but the handouts were in relation to the 1996/7 results. The bonuses were calculated as a percentage of pre-tax profit in excess of £30 million. The previously published accounts showed profits of £42 million, so the bonuses were paid.

However, and herein lies the crunch, accounting irregularities at its subsidiary, Matbro, inflated sales and understated costs. That led a substantial adjustment to the 1996/7 results. The restated profit fell to £15.8 million, or well below the target. On that basis, it appears the bonuses should not have been paid. Powerscreen's remuneration committee is now seeking legal advice on those payments.

But what about the granting of options? The three directors made gains in 1997/8 on 4.2 million shares in 1996/7 and a spokesman told The Irish Times "other benefits will be given full legal consideration". However, the group will have to weigh the possible benefits to shareholders against the legal costs involved. There were no surprises in the group's results, having been well flagged beforehand. Pre-tax losses came to £47.6 million, contrasting with the restated profits of £15.75 million.

Net debt came to £56.6 million, or double the group's net assets of £26.8 million. The position would have been worse but for the asset sales. Further sales have brought the debt down to £40.4 million and this will come down to a more manageable £18.87 million following the sale of USTC. Explaining the historic problems, the annual report made the profound statement: "Eventually, the group's systems, primarily based on cash forecasting, detected the Matbro losses." In other words, there must have been cries of "why are we running out of cash".

Powerscreen, which sees advantages in transferring its headquarters from Dungannon to London, would be vulnerable to any downturn in the economies in which it operates. Around 48 per cent of sales were generated in Britain and Ireland last year, but the bulk of this would be sterling denominated. It is also vulnerable to the Far East which accounted for almost 10 per cent of last year's sales. Nevertheless, it did generate an underlying operating profit of £25.3 million last year. That only included a six months contribution, amounting to £2.4 million in profits, from Moffett Engineering which was acquired a year ago. Merill Lynch, the company's brokers, reckons that Powerscreen could generate a pre-tax profit of £22 million in 1998/9 (others are predicting £30 million), bringing gearing down to 27 per cent.

But what about the prospects for a resumption of dividend payments? It will have to first erase the deficit of £16.9 million in revenue reserves before that is possible. Some of this would already have been reduced through the asset sale programme, and there is more to come. It could be in a position to pay a final dividend based on this year's results.

Powerscreen's web site concludes with the declaration of "unlimited solutions for limited resources". Now, nobody would expect it to live up to that unattainable promise, but if it regains investment confidence in the company, which it should, then the new team at Powerscreen will have pointed the group in the right direction.