Tarmac finds recovery elusive

The Investment Column

As Britain's biggest civil engineering and contracting group, Tarmac ought to have good idea of the lie of the land. The trouble is the company has developed a reputation for erring on the side of optimism too often. Its most costly error was to badly misread the housing market - a decision that ultimately resulted in last year's pounds 600m asset swap with Wimpey's minerals and construction business.

Yesterday Neville Simms, Tarmac's chief executive, again brushed aside the gloom and doom emanating from rival contractors. In particular, he highlighted the cost benefits arising from integrating the Wimpey activities.

These are expected to yield more than pounds 35m - twice as much as previously expected - and will put Tarmac in a strong position when market conditions improve. However, evidence that such a recovery is in sight is as elusive as ever.

In the year to June, underlying pre-tax profits fell to pounds 6.7m from pounds 29.1m, at the bottom of market forecasts, due to tough markets and bad weather. With a pounds 65m exceptional charge for restructuring the Wimpey activities, including 1,400 redundancies of a 26,000 workforce, the half-time loss widened to pounds 58.3m from pounds 15.9m.

The biggest hit was taken in construction services. Profits here shrank from pounds 5.5m to pounds 700,000 as the design consultancy business slipped into a pounds 2.8m loss, versus a pounds 2.6m profit, after orders dried up. Mr Simms admitted that Tarmac, preoccupied with Wimpey, had taken its eye off the ball.

The heavy building materials division fared better, with profits rising a fraction to pounds 39.7m. But the picture here is far from rosy given the heavy exposure to the UK roads programme, which is being cut to ribbons. Volume declines of up to 24 per cent cast doubt on Tarmac's ability to push through single-digit price increases for much longer.

Similarly, doubts must be expressed about Mr Simm's enthusiasm for the Government's Private Finance Initiative, where Tarmac is in contract or preferred bidder for pounds 800m of work. Few other contractors, or financiers, share Tarmac's belief in PFI's prospects.

Of equal concern is gearing of 66 per cent, which must raise a question mark over the 5p dividend being maintained.

Societe Generale Strauss Turnbull has cut its forecast for pre-exceptional profits this year to pounds 68m from pounds 86m and has lowered its 1997 estimate to pounds 94m from pounds 114m. That implies a p/e of 19 falling to 14 with the shares up 3p to 96.5p. Given Tarmac's bias towards the dull UK construction market, that looks expensive.

Steep price for More O'Ferrall

More O'Ferrall, the billboards to illuminated bus shelters group, is the dream investment - it enjoys a dominant position in a fast growing sector and has plenty of scope to grow in immature overseas markets. It is well financed with enviable cash flow.

Interim figures yesterday came with some bad news - the O'Ferrall is to be dropped to better reflect the fact that Adshel, the fast growing bus shelter arm, is now as big in group terms as the core More O'Ferrall billboards operation. There was nothing else to complain about.

Pre-tax profits of pounds 6.2m were 33 per cent higher than last year's first- half pounds 4.7m, struck from a 21 per cent increase in turnover from pounds 39.3m to pounds 47.8m. Earnings per share grew in line with profits to 12.4p and the interim payout rose 6 per cent to 3.6p (3.4p). Strong cash flow helped debts fall 31 per cent to pounds 10.2m.

Driving those good figures was a marked shift in advertising fashion, away from television, which no longer delivers the mass audiences of old, towards outdoor media. Blue-chip advertisers such as BMW, Kellogg's, Pepsi and Procter & Gamble have started using outdoor advertising for the first time this year, but even so 200 of the top 300 brands have never used it. There is plenty of scope for growth through new clients.

Elsewhere, More's new five-year plan envisages growth coming from diversifying away from bus shelters to backgrounds such as recycling bins and public toilets; from increasing yield per site by using shorter campaigns and better illumination; and from expanding in new markets such as South-east Asia.

The problem with such attractive investments, of course, is that they come at a price. On the basis of forecast profits of about pounds 18m this year, the shares trade on a p/e of about 20 at 691.5p, down 2p. For a growth rate going forward in the mid- to high-teens that is pretty steep.

McKechnie is back on track

McKechnie, the plastic mouldings to fasteners group, has been a nice little earner over the years. Hit hard by recession, profits have recovered smoothly during most of the 1990s and, after a pause for breath last year, the group now looks on course to resume the growth track.

Yesterday's figures reflect de-stocking, especially by electronics and telecoms customers, plus the weak market for housing-related products like curtain rails, which hit McKechnie from the end of 1995. Pre-tax profits up 11 per cent to pounds 50.3m in the 12 months to July were only kept moving by the pounds 5.7m operating contribution from three acquisitions picked up during the year.

Even so, the strength of McKechnie's market positions meant it could squeeze another 1.5 points out of gross margins in the year.

The de-stocking problem now seems to have eased, while the recovery in UK housing sales should spell good news - around 15 per cent of the business is dependent on the domestic DIY market. The 10 per cent of sales, mostly fasteners, which currently go into aircraft should also prosper during the current boom in orders. There should be some growth in the automotive side, around a quarter of the group, which will be boosted by a first- time contribution from last month's pounds 15.3m acquisition of Dzus, a maker of clips.

The only question mark is the fifth of sales made into the depressed Australasian new housing market, although McKechnie is confident that will pick up next year. Meanwhile, gearing of 22 per cent leaves the management well placed for further acquisitions.

Profits of pounds 62m this year would put the shares, up 22.5p at 551p, on a forward multiple of 13. Stay aboard.

PROMOTED VIDEO
Life and Style
fashion
Arts and Entertainment
Harrison Ford attends Blade Runner at Target Presents AFI's Night at the Movies at ArcLight Cinemas on 24 April, 2013 in Hollywood, California
film... but Ridley Scott won't direct
Sport
Hughes is hit by a bouncer from Sean Abbott
cricketStephen Brenkley on batsman's tragic flaw that led to critical injury
Sport
Dejected England players applaud the fans following their team's 3-0 defeat
football

News
people

Actress isn't a fan of Ed Miliband

Life and Style
Stefan Gates with some mince flies
food + drink
Arts and Entertainment
Rooney Mara plays a white Tiger Lily in forthcoming film Pan
filmFirst look at Rooney Mara in Pan
News
ebooksNow available in paperback
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

h2 Recruit Ltd: Business Development Manager - HRO - £70k+ ote

£35000 - £450000 per annum + £3k car, £70k ote: h2 Recruit Ltd: Do you want to...

Citifocus Ltd: Newly Qualified Accountants - Risk Mgmt

£Attractive Package: Citifocus Ltd: Prestigious financial institution seeks to...

Citifocus Ltd: Operational Risk Analyst

£Negotiable: Citifocus Ltd: Experienced operational risk professional with ban...

h2 Recruit Ltd: Business Development - Telecommunications - £50,000 OTE

£25000 per annum + £50,000 OTE: h2 Recruit Ltd: London, Reading , Southend, Al...

Day In a Page

Homeless Veterans Christmas Appeal: Drifting and forgotten - turning lives around for ex-soldiers

Homeless Veterans Christmas Appeal: Turning lives around for ex-soldiers

Our partner charities help veterans on the brink – and get them back on their feet
Putin’s far-right ambition: Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU

Putin’s far-right ambition

Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU
Tove Jansson's Moominland: What was the inspiration for Finland's most famous family?

Escape to Moominland

What was the inspiration for Finland's most famous family?
Nightclubbing with Richard Young: The story behind his latest book of celebrity photographs

24-Hour party person

Photographer Richard Young has been snapping celebrities at play for 40 years. As his latest book is released, he reveals that it wasn’t all fun and games
Michelle Obama's school dinners: America’s children have a message for the First Lady

A taste for rebellion

US children have started an online protest against Michelle Obama’s drive for healthy school meals by posting photos of their lunches
Colouring books for adults: How the French are going crazy for Crayolas

Colouring books for adults

How the French are going crazy for Crayolas
Jack Thorne's play 'Hope': What would you do as a local politician faced with an impossible choice of cuts?

What would you do as a local politician faced with an impossible choice of cuts?

Playwright Jack Thorne's latest work 'Hope' poses the question to audiences
Ed Harcourt on Romeo Beckham and life as a court composer at Burberry

Call me Ed Mozart

Paloma Faith, Lana del Ray... Romeo Beckham. Ed Harcourt has proved that he can write for them all. But it took a personal crisis to turn him from indie star to writer-for-hire
10 best stocking fillers for foodies

Festive treats: 10 best stocking fillers for foodies

From boozy milk to wasabi, give the food-lover in your life some extra-special, unusual treats to wake up to on Christmas morning
Phil Hughes head injury: He had one weakness – it has come back to haunt him

Phil Hughes had one weakness – it has come back to haunt him

Prolific opener had world at his feet until Harmison and Flintoff bounced him
'I have an age of attraction that starts as low as four': How do you deal with a paedophile who has never committed a crime?

'I am a paedophile'

Is our approach to sex offenders helping to create more victims?
How bad do you have to be to lose a Home Office contract?

How bad do you have to be to lose a Home Office contract?

Serco given Yarl’s Wood immigration contract despite ‘vast failings’
Green Party on the march in Bristol: From a lost deposit to victory

From a lost deposit to victory

Green Party on the march in Bristol
Putting the grot right into Santa's grotto

Winter blunderlands

Putting the grot into grotto
'It just came to us, why not do it naked?' London's first nude free runner captured in breathtaking images across capital

'It just came to us, why not do it naked?'

London's first nude free runner captured in breathtaking images across capital