The Square Mile was expecting a dull, RMC-style performance to confirm the gloom in the building materials sector. Moreover, the rumour mill was pointing to a demerger of Tarmac's construction division from the heavy materials' side, with a possible further split between building and supply services.
Wrong on both counts. Tarmac came up with sparkling results, with interim pre-tax profits up 29 per cent to pounds 49.7m and turnover up 5.1 per cent to pounds 1.5bn, well ahead of analysts' expectations. As for the demerger, Sir Neville Simms said that there was no reason to dismantle a successful group.
On yesterday's performance, it is hard to disagree. Margins went up in both building materials and construction. In materials, where Tarmac makes most of its profits, they rose to a healthy 10.2 per cent, as Tarmac managed to counteract a fall in volumes in most of its products with robust price increases.
In construction, which makes up the bulk of turnover, margins rose slightly but are still a wafer-thin 1.4 per cent. The company is working hard to move away from cut-throat project work to higher-quality maintenance jobs, where longer-term contracts ensure margins in the 5 per cent region. But there is still a long way to go to push up profitability in the construction division.
Sceptics point out that seasonal factors will make for a worse second half. The UK economic downturn also means price rises in building materials are harder to sustain. Tarmac's shares, up 2.5p to 87.5p yesterday, trade on nine-times forward earnings of around pounds 135m. Given the uncertainties about Tarmac's markets, they are no more than a hold but any further weakness is an opportunity to buy.