View from City Road: German roof has not fallen in

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The Independent Online
FEARS about the German economy pushed shares in Redland and RMC, two of the more resilient building materials companies in recent weeks, down 22p to 381p and 13p to 447p respectively. These fears have been overdone; indeed, their German exposure makes the two companies relatively attractive in a bombed-out sector.

RMC is Germany's largest building materials company. Last year, it made pounds 90.4m profit there, 46 per cent of the total, compared with pounds 34.9m in the UK. Braas, Redland's German subsidiary, supplies about half the country's roof tiles and is expected to contribute more than pounds 100m of this year's pounds 212m pre-tax profit.

There is also little doubt that the German economy is slowing as the government keeps interest rates up to prevent the high cost of unification fuelling inflation. But stock market investors are in danger of letting the gloomy outlook obscure the facts.

Permits for residential building - effectively next year's housing starts - which have been rising steadily for the past five years, increased a further 11 per cent in the first five months of this year. The housing shortage is being compounded by immigration from the former Eastern bloc, which has added 3 million to the population in the past five years and shows little sign of abating. That is likely to mean continued demand for Braas's roof tiles and RMC's concrete and cement.

Other parts of the construction industry in western Germany are slowing, but much of the slack is being taken up by infrastructure projects in the east. James Capel estimates that will limit the decline in construction next year to between 2 and 4 per cent, well below the 5 per cent average increases over the past five years but hardly a British-style slump.

But that slump means that, regardless of what is happening in Germany, investors are likely to be wary of the shares. Both companies are likely to report falling profits for the third year running, with the prospect of only a mild recovery at best in 1993. Panmure Gordon yesterday became the first broker formally to forecast a dividend cut at Redland, although not until 1993. German exposure may not be enough of an incentive to buy, but it is certainly not a reason to sell.

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