View from City Road: Let down by McAlpine

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The Independent Online
IF Alfred McAlpine's shareholders are angry that their dividend has been cut for a second time in as many years, pity Eric Grove and his family. McAlpine is buying their 40 per cent minority stake in its housing division for an initial payment of pounds 5.5m in cash and pounds 3.4 million in shares. Yesterday morning those shares were worth pounds 4.2m; by the evening, they had slumped by pounds 800,000.

Mr Grove is lucky. He has an earn-out deal that could bring a further pounds 27m if housing profits average pounds 15m a year up to October 1995, as well as a guaranteed pounds 9m in 1996. Other shareholders are given no clue as to whether their final dividend payment will also be cut, but their ability to share in the recovery in the housing business will be dampened by falling profits in the other three divisions.

Tarmac, Taylor Woodrow, Amec and Mowlem could also cut their dividends at the interim stage. But these cuts have been well-signalled; McAlpine's was wholly unexpected. Graeme Odgers, chief executive, may argue that the cut simply reflected the appalling conditions, which meant it lost pounds 71,000 before tax. Earnings were buoyed by the minority share in those losses, but they still slumped from 2.8p to 0.2p a share. But the dividend cut from 4.5p to 3p has saved the company just pounds 80,000 and a similar cut at the final stage would save it pounds 1m. That is hardly significant compared with debt of about pounds 47m, 29 per cent of net assets, particularly when shareholders coughed up pounds 38.8m in a rights issue last year. Only 18 months after McAlpine halved its final payment, shareholders might conclude that it cannot be trusted.

The performance of McAlpine's contracting division illustrates why the sector has underperformed the market by 36 per cent in the past three-and-a-half months. It made a pounds 300,000 operating loss, converted to a pre-tax profit by pounds 2.3m of interest receipts but margins are being squeezed, cash flow is drying up and interest rates are falling. While Mr Odgers promises that the division will be profitable in the full year, next year looks more uncertain.

Analysts are forecasting about pounds 5m profit and 6.9p dividends for the full year. The 14.6 times multiple is hardly cheap and a yield of 9.1 per cent too uncertain. The shares should be sold.