View from City Road: Tarmac chief needs to prove himself

Biggest is not necessarily best, according to Neville Simms, chief executive of Tarmac. The City clearly does not agree. Yesterday, the group announced the biggest provisions, and the biggest loss, of any building company in a universally awful reporting season yet its shares were marked up 8p to 141p.

But it is easy to seduce the City with tough talk about strengthening and tightening controls - particularly if accompanied by swingeing write-downs to make the rehabilitation that much smoother. The hard part is in making sure investors' expectations are not disappointed.

So far, he has earned the benefit of the doubt. His strategy of focusing on three core areas - contracting, quarry products and housing - looks right considering its leadership and reputation in these businesses. While the long-delayed sale of Econowaste is testing the City's faith in his pounds 300m disposal programme, he is clearly aware that his target of 33 per cent gearing by the year-end will be impossible without them.

That gearing target also explains his decision to rein back the housing division, which is expected to sell up to 1,300 fewer houses in 1993 despite the best first quarter since 1989. More than pounds 140m capital was cut from the business last year, and a further pounds 60m is expected this.

If expectations of recovery prove justified, Tarmac should manage to achieve about pounds 50m pre-tax profit this year - more than double the pre-exceptional result in 1992 - and perhaps pounds 100m next. That puts it on a multiple of almost 17 times earnings for 1994 and the dividend - if it is held at 5.5p - will still be uncovered. Shareholders prefer to focus on the pounds 200m which may be possible by 1996 and are reluctant to sell. Buyers should wait for more evidence that Mr Simms can live up to his promise.

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