Tarmac faces uphill task

Tarmac has been restructuring for most of the 1990s. Brick making went in 1995 and housebuilding was swapped for Wimpey's aggregrates and construction businesses in a pounds 600m deal last year. The results are now starting to come through in spades.

Underlying profits, ignoring the pounds 65m charge for the latest revamp unveiled two years ago, have soared from pounds 6.7m to pounds 38.6m in the six months to June. The strategy of focusing on heavy building materials such as aggregates and construction seems to be paying off, helped by an improving market and rationalisation savings now running at an annual rate pounds 40m. That mixture fed through to a surge in margins in heavy building materials, which jumped from 7.5 per cent to 9.7 per cent with the UK operation now close to 11 per cent.

Now Neville Simms, Tarmac's chief executive, is looking to raise each of the group's operations to the level of the best player in its class around the world. Certainly raising margins in construction from the current 1.1 per cent to the target of more than 3 per cent, possibly as early as 1999, could generate another pounds 30m of profits.

But Mr Simms still has an uphill task. Roads still represent 15 per cent of Tarmac's turnover, while Mr Simms' proselytising zeal for the private finance initiative and facilities management work has still to make much of an impact. The group's professional services operation, which includes facilities management, may break into profit this year, boosted by the pounds 100m Gravesham and Dartford hospital PFI project launched yesterday.

Assuming profits of pounds 127m in the full year, the shares, up 3p at 128.5p, stand on a forward p/e of 14. With a dividend still to be covered by earnings, they are a hold.