Alarm over strong pound

Building materials supplier Redland joins chorus of concern at sterling's surge
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The Independent Online
Redland, one of Britain's biggest building materials suppliers, will this week join the growing number of top firms expressing concern about the strength of the pound.

With huge operations in Germany and France, the group is particularly exposed to sterling's continued strength against the mark and the franc - which may knock 10 per cent off expected profits this year.

Last week, Guinness, Lonrho, Aga maker Glynwed and defence manufacturer Vickers all joined the chorus with profits warnings - Guinness alone expects to lose pounds 100m this year and next if the pound stays at current levels.

The rally since last summer has knocked exports to their lowest level for more than three years by forcing up the price of British goods on overseas markets, the Confederation of British Industry warned.

As well as threatening economic recovery, it has already cost jobs - British Steel is expected to push through 10,000 redundancies to remain compet- itive.

The CBI has been warning about sterling's strength since late January, when exports started to level off for the first time since the pound's exit from the European Exchange Rate Mechanism in 1992 accidentally kickstarted economic recovery.

At Redland, which reports annual results this Thursday, the concern is not so much about exports but "translation" - foreign currency earnings are now worth less in sterling terms. Nevertheless, it is likely to have a similar impact on the company's share price.

"It is certainly a major issue for them. They will definitely make reference to it. The question is whether the market has fully factored the effect into its forecasts," one close source said.

The pound has risen by over 40 pfennigs to 2.70 against the mark since last August. Though firms have take some comfort from a decline from 2.76 last month - its best level since Black Wednesday - expectations of an interest-rate rise after the election have kept speculators hanging in.

A recent rally in the dollar, on hopes of an imminent rise in US rates, has also allayed fears of leading companies such as ICI, Reuters and Glaxo- Wellcome, which trade heavily over there.

Europe remains the UK's principal trading partner, however, and analysts warn that British companies with a heavy exposure on the continent remain vulnerable.

Redland's 1996 profits are expected to come in at around pounds 260m, before exceptional write-offs - down from pounds 355m after harsh weather and reorganisation in Europe. The market presently expects around pounds 290m for the current year.

The firm uses average rates to translate - 2.35 for the mark last year against 2.26 in 1995 - so the historical effect of sterling's rise will be small. "At 2.70, however, if sterling remains at current levels, the impact might be around 10 per cent of what profits might otherwise be this year," one analyst said.

Redland is one of a clutch of building and construction companies to report next week, including Blue Circle, Caradon, Taylor Woodrow, Barratt, Amec and P&O.

Encouraging signals over the housing market are likely to add weight to the Bank of England's calls for a rise in base rates to head off inflation and further fuel sterling's rise.