The Investment column: Trust me, says Tarmac boss

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The Independent Online
Tarmac boss Neville Simms did not quite use Tony Blair's electoral mantra, "Trust me", but the message was much the same. A restructured Tarmac, he promised, had escaped from the past and an open road of opportunity lay ahead.

Britain's biggest construction and building materials group has certainly taken investors for a switch-back ride over the past five years. But the real benefits of its big initiative, swapping assets with Wimpey, are yet to be felt.

Making comparisons with Tony Blair's New Labour Party is not entirely inappropriate. When chairman John Banham unveiled the Wimpey deal at the end of 1995 he said the future was bright for "New Tarmac".

There was certainly a slick, electoral-style presentation on show yesterday as Tarmac unveiled end-of-year 1996 financial results. The only problem for the stage managers is that Simms might have the vision of Blair, but has the wordiness of Neil Kinnock. His reiteration of the words "shareholder value" almost obscured the basic message that there had been a 29 per cent improvement in operating profits and an upturn was predicted this year for its core UK businesses.

For the 12 months to 31 December the reported pre-tax profit figure was an unimpressive pounds 10.5m, which compared with pounds 20.3m last time. But strip out exceptional items, like the pounds 65m restructuring charge following the Wimpey swap, and the pre-tax result rose from pounds 67.1m to a respectable pounds 75.5m.

Tarmac has re-arranged its business into two main lines, heavy building materials and construction services. The former saw operating profit surge 27 per cent due to a strong performance from its US activities. Construction services also showed signs of improvement and Tarmac is proud of its pounds 1.4bn current order book and the potential for PFI contracts worth pounds 800m. Never one to stint on optimism, Mr Simms was trumpeting a much improved outlook for this year and boasting of rationalisation benefits of almost twice the original target.

On the basis of forecast profits this year of pounds 125m, before exceptionals, the shares, up11p at 115p yesterday, trade on a prospective price/earnings ratio of 12.8, a discount to both the market and the rest of the sector. With a 6 per cent yield, that looks fair value.