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No Pain, No Gain: Our Man's Portfolio

WHEN A share gets left behind there is usually a good reason. In the case of Galliford, the building group, it seems to be profit downgradings, which followed interim figures in February. Half-time profits rose 44 per cent to pounds 1.1m. The stock market had expected an even better performance and year's forecasts were promptly pulled back to about pounds 4.3m against the pounds 3.8m achieved last time.

The shares fell to 16p; they have since recovered to 20p. In the company's halcyon days, in the late 1980s, the price nudged 100p. Since then Galliford has toiled with limited impact. In 1994 it plunged deep into the red, slowly dragging itself back to a reasonable level of financial prosperity.

Its comeback has masked a revamp that has significantly altered the group's direction. Its new approach, coupled with the revival in the house- building market and the low rating accorded the shares, make it an ideal candidate for my portfolio.

The firm's house-building operations are concentrated in and around Lincolnshire and the South-west of England. Perhaps they are not the most bullish building environments. But as the latest mortgage figures show, the housing market is recovering dramatically and Galliford's involvement should enjoy improving returns. Shrewdly, it is gently pushing its housing operations more up- market. There is also a rewarding role in social housing contracting, which now represents some 16 per cent of its overall construction activity.

Indeed, it is the group's construction side that could represent the hidden treasure which could change Galliford's stock market standing. Although the division's profits will remain under pressure for the rest of this year, it is on this front that the group is being likened to such high-flying stock market stars as WS Atkins and Jarvis.

Such comparisons may be premature. But I think Galliford could have the potential to enjoy the sort of rewards that have flowed through to the much more highly rated performers in the field.

There are a number of intriguing projects. It appears to have won a pounds 70m schools contract at Birmingham, beating off bids from 27 other contenders, under the Private Finance Initiative (PFI) scheme. The deal covers the building and refurbishment of 10 schools and providing facilities management, including supplying caretakers and dinner ladies plus other staff, although not teachers, for the next 30 years. The contract was won after extensive consultations with teachers and unions. Galliford hopes to repeat its Brummie schools partnership success elsewhere.

Indeed, the group has already achieved another deal in Britain's second city - a joint venture for the pounds 113m Millennium Point project, which embraces the usual round of facilities featured in such millennium developments.

The group is also pinning its hopes on transport operations. It has just increased its stake in Rapid Transport International, preparing to develop a rail-bus network at Northampton, to 50 per cent. Work is due to start in the second half of this year. The system will involve a gas-powered, integrated bus and light rail service. Again, Galliford has a 30-year maintenance contract.

Other similar schemes are being negotiated, although local authorities are likely to wait to see how the Northampton scheme evolves before committing themselves. The transport division is not going to make a profit for some time. But its future potential is clearly considerable.

Partnership deals, PFI or others, are the construction name of the game these days, and Galliford seems to be working to consolidate its position in this area.

Profits for the year ending June will not create a great deal of excitement. But from then on, things should improve. And, of course, the art of investment is latching on to a share before any new attractions become apparent. Profits next year should be near to pounds 6m, which would underline the present low rating.

Unfortunately, the shares suffer the dubious distinction of a dividend yield - 5.5 per cent - coming out at a similar figure to the p/e ratio.

For a company that is not heavily borrowed and has a realistic land bank, plus its intriguing school and transport division prospects, Galliford deserves better.