INVESTMENT COLUMN: Blue Circle's cash pile begs questions

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The Independent Online
The most important aspect of yesterday's big jump in profits from Blue Circle was not the numbers themselves, which in cement at least were excellent, but the rapid rate of cash generation the company is achieving. How it spends it will be crucial to how the shares perform.

Stripping out exceptional items, underlying pre-tax profits jumped 47 per cent to £243.8m, ahead of analysts' expectations. Earnings rose a similar amount to 21.1p and the dividend, maintained throughout the recession, edged up 0.5p to 11.75p.

The good figures disguised vastly differing performances in the big divisions. While profits from cement roared ahead from £137.7m to £196.8m, bathrooms and heaters trod water at £67.1m (£64.4m), stubbornly refusing to benefit from the economic upturn. Blue Circle Cement, the UK cement operation, was the star performer, with a strong recovery in demand and a much lower cost base leading to a 78 per cent rise in profits.

BCC's sales volumes increased by 15 per cent, even faster than a 12 per cent expansion of the market, and prices moved slightly higher for the first time in four years.

There was a similar story in the US, where costs, prices and volumes all moved in the right direction. Even in Chile, where demand fell off last year, profits were maintained at fat margins and conditions have improved so far this year.

The shine was taken off cement's excellent performance, however, by Home Products.The significance of its performance outstrips its absolute contribution to profits because, as far as investors are concerned, the division provides evidence of what Blue Circle did the last time it had cash coming out of its ears.

With net cash flow of almost £300m and a reduction in borrowings of £234m last year, debts of £127m at the year-end are falling faster than the City expected. Investors must hope Blue Circle avoids throwing its surplus cash away this time and chooses to pay it back to shareholders in the form of a special dividend or share buy-back.

With forecasts for the current year around £280m and perhaps £340m in 1996, the shares, up 8p to 292p yesterday, stand on a forward price-earnings ratio of only 10 next year. That is good value given remaining growth and the prospect of a one-off payment.