Planned sale of French arm brings Redland some relief

The Investment Column

Redland's figures were pretty disastrous, but the market had been warned and its shares, bumping along the bottom of their five-year range, perked up a modest 6.5p to 360p in relief. Things have been going wrong at this company for so long that anything short of Armageddon tends to be welcomed with open arms.

The good news was that the company confirmed its intention finally to get shot of its loss-making French arm, bringing down the curtain on the Steetley acquisition that was heralded as "the deal of the decade" five years ago.

Selling France will result in a pounds 70m one-off hit to add to the pounds 75m write- off incurred with last year's brick sale to Ibstock. Just a book-keeping item, the company says, as they always do in these situations, but it is real shareholders' money that is being flushed away.

To be fair, Redland is in much better shape than it has been. Putting its roof tiles businesses together with those of its German associate Braas makes sense and it has left the balance sheet in healthy enough condition. The UK is on the turn as commercial building picks up and the cut in the road building programme starts to wash through comparisons. The US is rolling along nicely and Redland has a better exposure to the potential growth markets of Eastern Europe than any British company with the possible exception of RMC.

Also to be fair, the company faced some harsh external problems last year. The weather in Northern Europe last winter was appalling and sterling's strong rise made overseas earnings, the majority, suffer on translation.

But the company remains horrendously exposed to Europe's two dominant economies where a determination to meet the Maastricht criteria for EMU membership is wreaking havoc. Roof tile volumes tumbled last year in Germany and the outlook remains bleak. France is unlikely to recover and an early sale is the best hope.

The challenge for Redland will be to show it can use the proceeds from that disposal to good effect. Analysts have been calling for some time for a big acquisition in the recovering UK aggregates market and bids for Camas and Bardon, the remaining mid-size players, have been touted.

The trouble is analysts fear Robert Napier's job preservation instincts will outweigh any inclination to take risks. More small bolt-ons in the US look likely but they alone will not transform Redland.

Forecast profits before tax this year of around pounds 255m, before a jump to pounds 300m, put the shares on a prospective p/e ratio of 15 falling to 12. The shares are underpinned by a yield of 5.8 per cent but it is hard to see them going anywhere in the short run. Europe a drain on Hepworth

Hepworth has had very little going for it in 1996. Its building products, ranging from heavy drainage pipes to gas boilers, have been selling into depressed markets, particularly in continental Europe, which accounts for around half its business.

Demand has also been weak for Hepworth's refractory bricks, foundry sand and the like, which are used in late-cycle industries ranging from steel and glass to car making. A number of specific problems from the strong pound to higher redundancy charges have also started to weigh.

Add in a slightly worse-than-expected 9 per cent drop in pre-tax profits to pounds 67.6m for the year to December and the shares did well to hold their fall to 6p yesterday, leaving them at 253p. The market took some comfort from the fact that the total dividend is being held at 14.85p, along with glimmers of light at the end of Hepworth's tunnel.

Take the group's main pipes business, which caused most of the damage last year after operating profits slumped from pounds 16.1m to pounds 11.6m. Increasing demand is starting to address the overcapacity which has led to price competition in Germany in clay pipes.

Similarly, in the French Saunier Duval boiler business, where profits slipped from pounds 29m to pounds 28.3m, there were signs of some recovery towards the end of the year. And if negotiations to sell the refractories operations prove successful, Hepworth will be without a cyclical and rather low-margin operation later this year.

Even so, it will have to run to stand still in 1997, with the strengthening UK housebuilding market taking much of the strain. Currency translation could slice pounds 10m off the bottom line, while restructuring costs will be above last year's pounds 6.7m and the pension charge up from 1996's pounds 5.7m.

Profits forecasts for 1997 tumbled yesterday, but on a UBS figure of pounds 73m, the shares, now yielding 7.3 per cent, look well supported on a forward multiple of 13. Hold.

US sales push up Portmeirion profits

Shares in Portmeirion Potteries leaped by 27.5p to 527.5p yesterday after the group reported a 19 per cent leap in pre-tax profits to pounds 6.42m in 1996, that comfortably topped all the analysts' forecasts. Run for the past three years by Dr Mary-Lorraine Hughes, an MBA and PhD, it is the very model of a tightly run little ship.

Turnover grew by just 3 per cent last year to pounds 31.67m. UK sales were down 1 per cent, with the running taken up by exports, where sales rose 6 per cent.

Local currency sales were actually 10 per cent better in the company's biggest single market in the US, which accounts for 43 per cent of sales, and 15 per cent in both Canada and Australia.

There was no scope for price increases especially in the UK market, and the strength of sterling made exporting to Europe expensive. But costs were cut by 2 per cent in real terms, driving the return on sales up from 17.6 per cent in 1995 to 20.3 per cent, and earnings per share soared by 16.7 per cent to 40.89p. The dividend rose 15.2 per cent to 13.25p, keeping cover a prudent 3.1 times.

Capital expenditure was pounds 1.8m, including pounds 1m spent on quality improvements and cuts in costs and lead times. Another pounds 400,000 went on site work and preparations for the proposed manufacturing extension and Visitors' Centre, and pounds 300,000 was spent on extending the US warehouse, but cash balances rose to just over pounds 5m and the company earned pounds 200,000 net interest.

Fresh cost savings inevitably become progressively harder to achieve, but the analysts are convinced there is more fat to squeeze out and the UK market could prove more amenable in 1997.

Analysts moved their targets higher yesterday but the shares are still 37p below their 1996 peak and at 12 times prospective earnings of 43.75p they are not over-rated.

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