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Investment: Hanson on the right road

AMID THE gloom about impending global recession, few would regard building materials as a good place to look for defensive stocks. But in its first year focused on the sector, Hanson may prove that consensus wrong. Hanson is more bullish about the economic outlook than most. Andrew Dougal, its chief executive, insists there is a big latent demand for construction previously held back by the fear of higher interest rates.

But most crucial for Hanson is its presence in two markets where big public works are pending. In the UK, hospitals and schools are being rebuilt. Contrary to John Prescott's political posturing, roads will still be built and repaired. Roads will receive another pounds 400m of investment over the next three years while local authorities are earmarked for pounds 700m.

Even more important, the US government has guaranteed to spend $167bn (pounds 100bn) on a new highways programme over the next six years. As the owner of Cornerstone in the US, Hanson is in the perfect position to benefit.

The US market suits Hanson's strategy of buying "bolt-on" companies in the business. Hundreds of "Mom and Pop" operations are fair game for takeover. Hanson has disposed of pounds 500m of non-core businesses and now has net cash of pounds 186.6m, with ample opportunity for gearing. Meanwhile, it has insured itself against a big environmental liability in the US which was depressing its share price.

Profits to June were above expectations at pounds 78.8m compared with pounds 47.8m last time. With the shares 9p higher at 342p in a falling market yesterday and earnings per share for 1998 forecast at 33.5p, Hanson shares trade on a forward p/e of 10. This is in line with the sector but given Hanson's superior prospects that looks cheap. Buy.