The Investment Column: Blue Circle's prospects questioned

Blue Circle Industries, Britain's dominant cement producer, has been one of the better investments in a less-than-inspiring building materials sector.

Despite its heavy weighting towards two mature markets - the UK and US - the expectation has been that the cycle in both was on the upswing, while more exciting growth prospects could be provided by exposure to emerging markets, notably Chile and Malaysia. But yesterday's interim figures raised some question marks over future growth prospects.

The virtually flat stated profits of pounds 117m for the six months to June hid a 22 per cent underlying advance, excluding the effects of a pounds 25m charge for redundancies and write-offs associated with the long-term pay deal with UK employees earlier this year. However, the underlying picture is more mixed.

Most concern yesterday centred on Malaysia and the well-publicised concerns about its economy. Although Blue Circle was doing its best to reassure the City that there would be no recession there, the outlook remains cloudy, and in the meantime the operations in Malaysia and Singapore are hardly firing on all cylinders.

A 6.2 per cent drop in profits to pounds 16.7m in the first half, while volumes leapt a quarter, was hardly impressive. BCI blamed the low-margin imports which it was forced to sell to meet demand and production problems. A new plant firing up next week could claw back as much as pounds 10m of lost margin, but the economy needs to perform.

Meantime, the Chilean market continues to suffer ahead of a big capacity increase due to be brought on by a competitor over the next two years. Competition has forced prices down by up to 7 per cent, cutting profits by 12 per cent to pounds 18m, but they remain more than 50 per cent above those in the US, suggesting there will be more pain to come.

Even stripping out a maiden pounds 15.4m contribution from St Marys Cement of Canada, acquired in April, underlying growth in North America was a chunky 8 per cent. The market there continues to go like a train, but it is hard to see this pace being maintained for too much longer.

The high operational gearing of the UK cement business meant modest volume and price increases fed through to a handy 22 per cent jump in profits. But even if an upturn in the construction industry eventually feeds through to Blue Circle, imports will always act to trim some of the gains.

All of which helps explain why Blue Circle is keen to parade the pounds 300m or more of firepower it has to buy new growth in emerging markets such as the Far East and Latin America. Even with Panmure Gordon downgrading its full-year forecast to pounds 335m, the shares, down 7.5p at 395p, stand on a forward p/e of 14, which looks a fair rating.