Bottom Line: ECC confidence looks well placed

ANDREW TEARE, chief executive of English China Clays, is clearly wary of making himself a hostage to fortune. He eschews promises of unlocking shareholder value in his explanation of the planned demerger of the building materials business. Instead, he says, the rationale is to create two more focused businesses.

Recovery in construction is likely to outpace that in the paper industry, in the short term at least. The shares of the combined group are already on a historic multiple of 25, although given the heady multiples of rival building materials groups, there may be scope for some improvement in the rating of Camas - as the demerged business will be called.

That may, however, be limited if ECC goes ahead with its plan to land Camas with a 3.75p dividend. Camas's earnings last year were probably about 2.3p allowing for the extra costs of the demerged business. It will take a dramatic recovery in profits for that to be even once covered this year.

The same, of course, is true of the minerals business, which will form the core of the continuing ECC. While operating profits in materials, before exceptionals, rose pounds 1.4m to pounds 16.9m, minerals dipped from pounds 91.8m to pounds 74.4m, accounting for the lion's share of the drop in group pre-tax profits from pounds 100.2m to pounds 88.1m.

An increase in the tax charge now that the losses which benefited last year's bill have been used up meant earnings fell more sharply, from 26.72p to 20.45p.

Mr Teare is pleased to have secured a 'very small' price rise in parts of Europe and, with paper volumes up 3.5 per cent, his confidence that this will hold looks well placed. He is working hard at boosting the volumes of Calgon, the speciality chemicals business acquired last June.

More optimistic analysts think post-demerger profits could hit pounds 96m this year, giving earnings of 22.2p - sufficient to cover its share of a maintained 20p dividend. That is enough to justify buying the shares, regardless of Mr Teare's caution on the demerger.