RMC is worth a bet on a bid

London Bridge Software; Delancey Estates
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The Independent Online

It's not just the technology sector that has disappointed investors in the second half of this year. Plenty of boring Old Economy firms, among them RMC, the ready mix concrete company, have failed to deliver too.

It's not just the technology sector that has disappointed investors in the second half of this year. Plenty of boring Old Economy firms, among them RMC, the ready mix concrete company, have failed to deliver too.

RMC, the world's sixth-largest aggregates group, issued its umpteenth profit warning yesterday, saying that annual profits would be about £20m lower than forecast, at £205m, down 26 per cent on 1999. The news was not as bad as expected, and sent the shares up 4 per cent to 577p.

Given RMC's repeated complaints about fuel prices, wet weather, and the weakness of the economy in Germany - which provides a quarter of its business - it's hard to see why the City keeps on overshooting in its expectations. The main problem is forecasting changes in regional cement prices.

Yesterday RMC said the situation in west Germany had gone from bad to worse, while the integration of this year's acquisition of Rugby remains unfinished. But the news wasn't all bad. The strategic review instigated by Stuart Walker, the new chief executive, will deliver £50m of savings, £10m higher than anticipated, albeit at the expense of some 1,400 jobs. Further disposals, following this months' sale of the Great Mills DIY business to Focus Do It All, should raise £200m to cut RMC's £2bn debt.

Germany, which RMC doesn't see improving before 2002, is the main area of uncertainty ahead, although the group says the broader economic outlook is hard to fathom too. Even so, RMC believes its performance in other countries - France, Spain, Ireland and the US - will be flat or modestly positive. That puts the pressure on cost-cutting to deliver earnings improvement. JP Morgan, the investment bank, forecasts pre-exceptional, pre-tax profits of £207m this year, after goodwill charges, rising to £240m in 2001. Consolidation in this industry continues apace, and RMC is a bid target. On a price-earnings ratio of about 10, the shares are too cheap.

London Bridge Software

Shares in London Bridge Software, which supplies the financial services industry, have plunged 66 per cent since its interim results in September. But investors who followed this column and sold into the stock's strength at the time should think twice about piling back in.

LBS is heavily exposed to the business cycle in the US, which provides two-thirds of its turnover. That was just swell this year, when the US economy boomed. But in 2001, it could really suck, as they say. Indeed, the US operations have not quite met their budget for 2000, although yesterday management bizarrely held out hope of a flurry of contract signings in the four remaining working days of the year.

It is debatable whether LBS should risk future business by rushing through contracts at discount rates to meet an arbitrary year-end cut-off. As the company noted, missing the budget this year "would not affect the strategy or the budgets for next year". That said, LBS has recently concluded negotiations on four orders.

On forecasts of £14.6m in pre-tax profits this year, rising by about 40 per cent in 2001, the shares, off 6 per cent at 327.5p yesterday, enjoy a forward p/e ratio of 72, falling to 54 next year. Given a likely first-half downturn in the US, that looks too dear for the growth on offer.

Delancey Estates

There has been a buzz of expectation surrounding Delancey Estates since June, when the property company threatened to go private if its share price did not improve, and said it intended to focus on its central London assets.

Delancey, run by Jamie Ritblat, son of property tycoon John, delivered on one of its promises yesterday by selling four shopping centres to Dunedin Property for £121m. The company raised a further £14m by selling its Dixon Motors assets to a private investor. The proceeds will cut the group's £511m debt. A further five shopping centres, within a joint venture with Norwich Union, are still under review.

Delancey's stock has performed well lately, amid speculation, denied by the company, that Delancey is looking to merge with Mapeley, the privately held property outsourcing group that manages the Inland Revenue's offices.

The shares were up 1p at 100p yesterday, after he group posted an as-expected 58 per cent uplift in half-year profits, to £3.9m. Net asset value per share came in at 139.5p. The stock's discount to NAV is in line with the rest of the sector. But with further asset upgrades likely next year, Delancey, in which George Soros's Quantum Fund is a major investor, looks good value.

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