The construction recession catches up with Wolseley

THE INVESTMENT COLUMN

Jeremy Lancaster, who steps down as chairman of Wolseley in July, has produced stunning returns in his 22 years at the helm. Since taking over as managing director in 1973, he has overseen a 141 per cent outperformance by the shares against the rest of the stock market.

But having become the world's biggest plumbing supplies merchant and a substantial player in heavier builders' requirements like timber, it was hardly surprising that the construction recession would catch up with Wolseley. The group warned in October that the profits train would hit the buffers this year.

Yesterday it confirmed that business conditions had measured up to worst expectations, while revealing that the Ashley & Rock electrical manufacturing group had been forced to take substantial rationalisation costs to counter cheaper Asian competitors. Combined with the announcement of a 5.4 per cent dip to pounds 111m in half-time profits to January, the news sent the shares 10.5p lower to 466.5p yesterday.

The market's reaction is a little churlish given that some of the problems are unlikely to repeat themselves. Wolseley has acted promptly to address the difficulties facing Ashley, which accounted for the lion's share of an pounds 8.37m underlying fall to pounds 17.9m in profits from manufacturing and other activities.

Meanwhile, Wolseley's other dud related to the cooling of the overheated housing market near Raleigh in North Carolina. Stripping out acquisitions and exchange movements, that represented the bulk of the pounds 6.51m underlying drop at the US building distribution operations to pounds 46.6m.

Analysts were duly cutting forecasts for this year to around pounds 237m yesterday, putting the shares on a forward multiple of 16. What really matters now is next year and here Wolseley is relatively optimistic. The UK housing market is showing signs of life and the US would be boosted by interest rate cuts.

There remains plenty to go for in the plumbing market in the UK and Wolseley has shown a sure touch in its acquisitions. Hold.

Williams needs

long-term view

The view you take of Williams depends on your time horizon. In the long run, a growing exposure to developing markets in basic businesses such as fire protection, security and building products must be attractive. Shorter term, however, it is difficult to get too excited about similar operations slugging it out in Europe and the US.

Full-year figures for the 12 months to December confirmed the difficulties facing Williams and the skill with which it is managing them. Selling paint, sealants, fillers and the like has been an uphill struggle so it is unfortunate that building products is far and away Williams's biggest division. Better demand from the aerospace industry helped fire protection, but locks and alarms also suffered from the moribund housing market. Against that backdrop, cash flow in excess of operating profits and a return on sales of 15 per cent was an impressive performance.

Aggregate profits, including a useful pounds 9m from the flotation of Cortworth, emerged at pounds 228.3m, a 14 per cent rise. Stripping out the one-off gain, earnings per share rose 2.3 per cent to 22.3p while the dividend increased by 5.6 per cent to 14.25p.

The short-term problem from an investment perspective is that Williams is already very well run. In the long run, however, investors have rarely regretted backing the excellent management of dominant brands, buying top-quality shares and tucking them away.

On the basis of forecast profits of pounds 240m this year, the shares, down 6p to 325p, stand on a prospective price/earnings ratio of 14. Expect short-term dullness but long-term outperformance.

Little room for error at TI

As usual no disappointments from TI, the aerospace to car components company. Pre-tax profits up 21 per cent to pounds 184.8m were at the top of the range, struck from sales up pounds 300m to pounds 1.7bn, with all three core businesses - John Crane, Bundy and Dowty Aerospace - showing strong organic growth.

A slowdown in European and American automotive sales is a prominent cloud, with growth in both key markets expected to remain flat this year. But the future for TI's aerospace and landing gear business looks far more promising.

Airlines are returning to profit and that is already translating into aircraft orders. Some 40 per cent of landing gear sales from TI's Messier- Dowty joint venture go to Airbus, and the division is also supplying Boeing's new 777. The Boeing business should also be a stepping stone to orders from other US airframe manufacturers.

That helped Dowty's sales top pounds 440m, up from pounds 299m in 1994, including for the first time the group's share of the sales from Messier-Dowty. Operating profits soared to pounds 36.5m from pounds 6.3m.

John Crane, which includes polymer engineering, made operating profits of pounds 84.6m, up from pounds 72.2m, on sales up from pounds 491m to pounds 546m. Car and industrial component maker Bundy's operating profits rose from pounds 58.4m to pounds 73.5m, on sales up from pounds 630m to pounds 718m, benefiting from the US car makers' new model programmes.

Analysts have upgraded this year's forecasts to between pounds 201m and pounds 225m, putting the shares on a prospective price/earnings ratio of about 16. TI has a string of quality businesses and a strong order book but, at 486p, up 6p yesterday, there is little room for error. About right.

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