Another headache at Tarmac

THE INVESTMENT COLUMN

Neville Simms is a perennial optimist, which is just as well given the endless headaches he has had to deal with as chief executive of Tarmac, one of the stockmarket's most appalling investments over the past 18 months.

Since March 1994 the shares have fallen from 196p to just 88p yesterday, a 55 per cent drop, representing a similar underperformance of the rest of the market. Since the peak of the last building boom they have lost three quarters of their value.

Results yesterday confirmed that the recovery which began three years ago is running out of steam.

While a 23 per cent rise in underlying operating profits looks impressive at first sight, it is from a very low base and at 4 per cent the basic trading return on sales is still uninspiring. For the full year, the company warns, pre-tax profits will struggle to exceed last year's.

A reported loss of pounds 15.9m, compared with pounds 23.1m in the first six months of 1994, is a harsh measure of Tarmac's performance because it includes a pounds 45m goodwill write-off from the disposal of Tarmac's brick-making operation to Ibstock.

But goodwill write-offs represent real money that shareholders used to own and which the company has frittered away - the reported figures are quite as meaningful as the underlying numbers.

At the divisional level it is a mixed bag. Quarry products recovered nicely during the half, with profits jumping from pounds 14.2m to pounds 25.8m on only marginally increased turnover as price rises held. Other building materials also did well to squeeze 50 per cent more profit out of flat sales and Tarmac America is at last generating a respectable return.

But a plunge in profits at housing from pounds 18.9m to pounds 8.7m confirmed the real reason for the `For Sale' sign currently sitting over the division.

Even stripping out the effect of geographical and product mix changes, underlying house prices slipped 2 per cent compared to a year previously. Coupled with an 8 per cent decline in unit sales the blow to profits was inevitable and it would frankly be surprising if Tarmac were able to achieve a great deal more than net assets for the business when it finally finds a buyer.

A pounds 2.9m profit from sales of pounds 451m in the contracting business is a totally inadequate return while professional services, however much Mr Simms sees the design and facilities management arm as the way forward, is simply too small at the moment to matter very much.

All in all a bleak picture that confirms the increasingly widely held view that Britain's integrated contracting, housebuilding and aggregates businesses spread themselves too widely and fail to do any of their constituent businesses properly.

There is, however, a price for everything and Tarmac must be pretty close to it. At 88p, and taking yesterday's promise of a maintained 5.5p full year dividend at face value, the shares yield 7.8 per cent. Not a bad return while you wait for recovery or a bid, whichever comes sooner.