Bottom Line: Builders' results add new layer of confidence

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The Independent Online
THE CITY has spent most of this year regretting its 1993 love affair with building companies. Their shares have been marked down aggressively as gloomy news on housing and interest rates has emerged, leaving them back where they started, relative to the market, this time last year.

Yesterday's crop of results from the sector was good enough to make investors wonder whether their pessimism was overdone. Shares were marked up across the board as John Mowlem, Persimmon and Rugby Group reported respectable profit increases.

The under-performance so far this year has removed much of the hope value in the sector, leaving builders at 13 times, and materials companies at 13.6 times, 1995 earnings. That is still a premium to the market - on about 12.8 times - but, given that earnings could rise by as much as twice the market rate in 1995, surely some premium is justified?

Yesterday's results confirm that the recovery is under way, though they hardly suggest it will be an exciting one. Persimmon's unit sales and margins rose, but the fact that sales stalled in June and July and that house price inflation is sluggish at best, means that achieving acceptable returns will be a long, hard slog.

With only three cement suppliers, Rugby is in a strong position to force through price rises, yet it only managed a 2 per cent increase this year. Mowlem's contracting profit relied heavily on interest receipts, but the recession has made buyers much more reluctant to pay in advance. The company warns that margins and volumes will stay depressed at least until the end of next year.

Investors should learn the lesson of the past year and pick their shares with care. Chose house builders which have enough of a land bank to stay out of the market if they need to - Berkeley Group and Wilson Bowden are two that stand out. Materials companies need to have exposure to the commercial side of contracting and, ideally, European exposure. RMC, one of the best performers in the depths of the recession, is a good bet for the recovery, too.

(Graphs omitted)