The Investment Column: Meyer may not have the right tools for the job

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The Independent Online
MEYER INTERNATIONAL, the builders merchant business, yesterday acted like the jobbing builders who constitute its customer base and lashed out loads-a-money on a US tool hire business. It also posted results showing the move was a strategic necessity given the fortunes of the business. But will it be enough to reverse the shares' tendency to lag the market?

Although the pounds 61m purchase of RentX, which has 72 US-based toolhire outlets, will boost Meyer's US sales by 20 per cent, around 70 per cent of group sales will continue to come from Jewson, the UK builders merchants business predominantly based in the North.

Jewson's prospects are questionable. Like-for-like sales fell 3 per cent this year following some impressive re-jigging of its stores as Meyer integrated the previous year's acquisition of 189 Harcros builders merchants. But during the refurbishments the jobbing builder has been nipping round the corner to pick up his plaster from rivals.

Nevertheless, the Harcros deal boosted Jewson's margins to around 9 per cent and should generate efficiency gains of pounds 25m this year. But the northern economy remains depressed and Meyer's claim that it will win back all of the remaining pounds 10m of the lost pounds 30m annual sales looks optimistic.

Meyer believes Jewson will benefit from an ageing middle-class population less keen to dabble in DIY. Even if the assumption is correct, there's little scope for further margin growth at Jewson. Small-fry ventures like last month's pounds 7m acquisition of a portable toilets business suggest Meyer's best way to boost sales may be to snap up smaller independent builders merchants.

Meyer's US move has some logic, even at a consideration of 1.8 times sales, but it is risky. The US toolhire market is thought to be worth between $10bn (pounds 6.3bn) and $20bn. It is growing at 15 per cent per annum. There are, however, few barriers to entry; players can differentiate themselves only through the location of their sites. The high price Meyer has paid for RentX indicates that it is not the only company wanting a slice of the action.

Credit Lyonnais expects pre-tax profits of pounds 86m and earnings of 37.6p this year. The shares fell 11.5p to 445p yesterday putting them on a forward p/e of 12. That seems fair given the maturity of Meyer's UK business and uncertainty surrounding its competitive strengths in the US.

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