Bottom Line: Mowlem's view is tinted by optimism

MOWLEM'S pounds 63m cash call is a rescue rights issue, whatever the company may claim about focusing on its core and strengthening the balance sheet.

As with Costain, which also came cap in hand to its shareholders last year, the logic of a diversified structure in which cash-generative contracting financed other capital- hungry divisions has been scuppered by endemic over-capacity in the UK construction market.

Recession has given contractors' clients the whip hand in negotiating deals, and smaller stage payments have resulted in a net cash outflow of pounds 36m over the past two years.

As a result, and again like Costain, Mowlem has been forced to sell the only bits of the business that stood a chance of benefiting from the early stages of the recovery - house building and London City Airport.

It simply cannot afford to fund the expansion of the homes division, which for many diversified building groups is providing the only ray of light this year. The airport is up for sale just as it looks like breaking even.

The company will survive, but two late-cycle, unprofitable divisions are hardly attractive. It is not surprising that the realisation of what remains should have undermined the naive optimism of the stock market so comprehensively.

That rose-tinted view of the future is shared by the company's new management team when they forecast a return to contracting margins of 2 per cent and pre-tax profits of pounds 40m.

In reality, Mowlem is unlikely to announce a profit until the spring of 1997, and a modest pounds 12m even then. That puts the shares on a price/earnings ratio of 17 three years out. Even after yesterday's 40p fall to 112p, the shares are expensive.