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The Investment column: Question mark over RMC as German boom fades away

A couple of years back no-one had a bad word for RMC as it rode what history has proved to be an artificial boom in Germany's massive construction market. Tax breaks and the after-effects of reunification created a couple of bumper years in 1994 and 1995 and because it is basically a better business than the other big British player in Germany, Redland, RMC cashed in.

Now there are question marks over the company that never existed before. The change in exchange rate policy yesterday looked dangerously like an attempt to boost profits artificially at the end of a difficult year and analysts are starting to grumble, rightly, about the company's old-school presentational style, which means an archeological dig is required to get to essential information such as individual country sales and profit contributions.

The other real concern about RMC is that it is over-exposed to one huge but troubled economy. The company says Germany accounts for about a third of Europe's construction spending so it is right that it should represent a similar proportion of RMC's turnover. But if the mid-1990s boom proves to be unrepeatable, as some brokers now fear given the stringent demands of EMU qualification, RMC needs to beef up its operations elsewhere.

Chief executive Peter Young points to the US, but it only represents a tenth of sales. Its operations in Europe outside France and Germany are going well, as is Israel, but they are too small in group terms to make a real difference. At home, the second-biggest market, the government's refusal to reverse the massive under-investment in the country's physical fabric means the UK can hardly be relied on to provide any growth.

RMC is a very conservative organisation and has traditionally shunned the sort of expansion by acquisition that has seen Irish rival CRH grow from nowhere to become one of the industry's dominant players. There is nothing wrong with the company's preferred route of investing heavily in its existing businesses, but it is a much longer process and time is not on its side.

The company's shares have fallen almost pounds 2 from their peak last September of 1195p, when the market quite simply misread what was going on in Germany. At 996.5p, down 4.5p yesterday, they trade on 13.5 times forecast earnings for 1998 on the basis of expected profits of pounds 345m after pounds 310m this year. That compares with a sector average for 1998 of 11.9.

That sort of premium only makes sense if you believe either the company's management is vastly superior to the competition or Germany is about to pick up faster than people fear or both. This is a well-run company, but that sort of rating leaves no room for error. Expensive.