Bottom Line: Camas potential

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The Independent Online
ENGLISH China Clays confirmed the demerger of its aggregates and building materials division yesterday. Existing shareholders will receive one new Camas share for every ECC already held.

Price rises of between 5 and 7 per cent in March give substance to the hope that the business is being spun off at the bottom of a particularly savage downturn for suppliers of the construction industry's raw materials. But, after falls of 30 per cent since the 1989 peak, Camas's recovery is from a very low ebb.

From a new investor's perspective the fact that Camas's pounds 11m profits last year were less than a quarter of 1989's, with the core European operations faring even worse, offers great potential.

Margins, which peaked at an unsustainable, and probably unrepeatable, 17 per cent in the boom, fell as low as 3.4 per cent last year. In the US they have held up at 11 per cent or thereabouts for the past four years and there is no reason why the European businesses should not achieve that as well.

Doing so depends on using Camas's strong position among the UK's top five aggregates producers to the full and benefiting from a continuing recovery in the housing market to pull the concrete blocks arm back into profit.

On the basis of a 10 per cent operating margin, and assuming no dramatic increase in the pounds 67m debt with which ECC is demerging Camas, profits could rise to almost pounds 50m at the top of the next cycle, five times last year's return. But until there are concrete signs of that being achieved a better measure is probably the yield offered by a promised 3.75p dividend.

Bardon, perhaps the closest comparison in the sector, at present sits on a 6 per cent yield as does its much bigger rival Redland. There are reasons for both to be rated so cautiously but as a new issue, and with little earnings cover until 1995, Camas can probably expect no better.

A similar yield would imply an opening share price on 1 June of 78p. At that price the shares would trade on a prospective p/e of 21 this year and 16 next. With plenty of recovery potential the shares are good value up to about 85p, but should not be chased any higher.