Powerhouse blows fuse for RMC: The Investment Column

Shares in building materials groups have been on the rise recently in the fond belief that the German economy, the powerhouse of Europe, was somehow on the mend. The fact the Bonn government has just approved massive public spending cuts to whip Germany into shape for European monetary union obviously passed the market by. As, no doubt, did a German building industry federation survey showing investment in construction projects will fall this year for the first time since the Berlin Wall came down, with demand 8 per cent lower in real terms in the first half.

RMC delivered a timely reminder yesterday that things could get even worse before they get better. It is the biggest British company in Germany so it ought to know which way the wind is blowing. It has been there since 1955 and now operates from more than 500 locations.

Profits in Germany, easily RMC's biggest market, collapsed by 57 per cent to pounds 28m in the six months to June. Bad winter weather was partly to blame for the 12 per cent drop in volumes but the biggest factor was weakening demand which hit all product sectors.

According to the chief executive, Peter Young, the second half remains difficult and 1997 will see volumes decline even further.

Worse, RMC looks pretty boxed in. The high German cost base is being pruned - a redundancy charge of pounds 3.5m was included in the interims - but the job cuts are nowhere near as deep as those taken by other capital goods groups, notably BICC, where half the German workforce went in the past year alone.

And unlike large German manufacturing companies which are rushing to the exits to set up in the low-cost countries of eastern Europe, RMC has to be on its customers' doorsteps. Concrete and travel do not mix. So RMC is resigned to staying put, hunkering down and hoping the pain is short-lived. It is right to say that Germany will improve again, but don't hold your breath.

RMC cannot expect much relief elsewhere. In the UK, where volumes fell by 8 per cent in the first half, houses may be selling again but housebuilding remains dormant

And no favours can be expected from France, Austria and the Benelux countries, all of which are in the same Maastricht convergence boat as Germany.

By RMC's own admission, full-year profits will be lower than the record levels reached in 1995.

Panmure Gordon has cut its forecast back to pounds 282m from pounds 314m, putting the shares, down 42p to 1,110.5p on the results, on a forward price/earnings ratio of almost 17 - or an expensive looking 13 per cent premium to the market. Expensive.