Aggregate Industries seems solid for now

Tibbett & Britten; Kunick
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The Independent Online

Building materials companies such as Aggregate Industries, pose an interesting investment dilemma at the moment. On the one hand the potential for a slowdown in the housing and commercial construction sectors casts a cloud over prospects. But the silver lining is the huge infrastructure projects which are being sanctioned by the UK and US governments. In America for example, the government last week approved $56.9bn (£39bn) of infrastructure spending of which $31.8bn is for highways, a rise of 10 per cent on this year.

Aggregate's trading statement yesterday illustrated the conflicting trends. Government work accelerated during the year. But there was a softening in the housing and commercial markets in July. The 11 September attacks caused a sharp initial drop in activity from an already declining base though there was a strong recovery in October and November.

In the UK, trading has been stronger with an improved second quarter continuing into the second half. Mild weather in the Autumn also helped the Tarmac quarry interests acquired for £30m last year.

Across the group a key boost has been a more stable price of oil which soared last year and caused a significant hit to margins. Oil is a key raw material in the aggregates sector where it is used for bitumen and asphalt as well as for heating purposes.

As for the outlook the company has been battening down the hatches in the face of a downturn. Costs are being cut, capital expenditure limited and cash generation maximised. Meanwhile, falling interest rates are alleviating the burden of the group's debts.

Two other factors with this company are rumours of an OFT investigation and the perennial talk of a bid. On the former, Aggregate says it has not been contacted by the OFT and is not aware of any investigation despite press reports in September. As for the latter, it is hard to see who would stump up the cash, especially given CRH, one of the potential bidders, has issued a profits warning.

With the company on track to make £123m this year the shares – unchanged at 115p – trade on a forward p/e of 14. That seems about right for now.

Tibbett & Britten

The logistics group Tibbett & Britten has a habit of slipping up every now and then and there was a familiar wobble yesterday when the company's trading statement caused the house broker to rein back profit forecasts for the current year.

The problem is largely in the UK where the warm Autumn weather caused a slowdown in clothing sales on the high street. This has a knock-on effect to distributors such as T&B whose payments are volume related. A further problem was when sales surged back in November the pattern was erratic forcing T&B to hire contract labour one week while sending half-empty lorries around the country the next.

The other problem has been a cock-up at a new warehouse being operated for Mothercare, the childrenswear retailer. Not that you would have known from the statement which failed to mention any problem at all. All it said was the warehouse had "seen significant improvement in throughput". In fact the problems have caused Mothercare to issue two profits warnings with £4m of incremental costs. It is fair to say Mothercare will be looking to claw some of this back from T&B, though T&B says the impact on its results will not be material.

Even so, the house broker, Deutsche Bank chopped £2.5m from its current year forecast to £33.5m, partly due to the Mothercare problems and partly due to the clothing slowdown.

The other problem is in the US where the company is in dispute with Safeway, the supermarket group, over an £18m unpaid bill. Safeway is confident the bill will be paid but has given up trying to chase the interest. The rest of the group's American operations have performed well, suffering no impact at all from the 11 September attacks.

The shares fell 20p to 600p on the news and trade on a forward p/e of 13. Sell.


The troubled leisure company Kunick suffered a further setback yesterday when it announced it had lost a key contract in one of its main divisions which operates amusement machines for pubs and arcades. The deal, which represented 5 per cent of that division's sales, is thought to have gone to its arch rival Leisure Link, a private firm which was spun out of Bass. Worse still, the company cautioned that market conditions in amusement machines remained turbulent.

For the year to 30 September, Kunick recorded a pre-tax profit of £9.7m compared with a £5.4m loss last time on sales of £176.9m, up from £175m. The figures were in line with recently downgraded forecasts.

At least its facilities management business, which operates leisure centres on behalf of clients, seems back on track. Sales there rose 28 per cent to £74.8m with a profit of £3.3m.

But profits at the amusement machines arm fell 12 per cent, hit by the loss of the contract. It blamed the upheaval mainly on changes in pub ownership where many managed houses have been transferred to less lucrative tenanted operations.

Analysts are also wary of the company's balance sheet where borrowings total some £25m. Add in a convertible issue, however, and interest cover falls to less than two times, they say.

The company's house broker lopped £800,000 off its 2002 profit forecast to £9m yesterday. With the shares down a penny at 14.75p the stock is on a forward multiple of 10. Until Kunick's markets stabilise and the impact of the new gambling regulations can be quantified, there is better value elsewhere. Avoid.