View from City Road: Tarmac goes back to its roots

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The Independent Online
NEVILLE SIMMS is making a good start as chief executive of Tarmac. Its shares rose 8p yesterday to 78p, despite a plunge to a pounds 15.7m loss, compared with an pounds 18.2m profit, in the first six months of the year. That partly reflected relief in a maintained 3p interim dividend and the promise that the final will also be held at 2.5p. But it also demonstrated the City's enthusiasm for Mr Neville's air of realism about prospects and asset values, against the background of falling interest rates.

Mr Simms is taking the group back to its roots, something it should have done earlier in the recession. It will focus on three core divisions - quarry products, housing and construction. That means most of the industrial products division is for sale, the withdrawal from property will be accelerated - implying significant provisions at the year-end - and there will be more rationalisation in the US.

The realism also extends to the core divisions. In quarry products - blacktop, aggregates and so on - Mr Simms rejects industry complaints that it is partly to blame for falling prices by aggressively pursuing volume, but he says the current strategy is to use its market leadership 'to help the industry achieve realistic prices' and capacity cuts will contine. Housing will be scaled down by about 2,000 homes a year, to around 7,500, releasing about pounds 100m of working capital - and again indicating significant year-end provisions.

It has already raised pounds 100m through asset sales and a further pounds 100m is due by the year- end with the same again in 1993. That should help it achieve its target of 25 per cent gearing by the end of 1993, compared with the 40 per cent expected at the end of this year.

As a guide to the likely size of the reshaped business, Terry Mason, finance director, said he 'would not feel comfortable' with interest cover of less than five, on an interest bill that should fall at least pounds 15m to below pounds 45m. That implies pre-tax profits similar to the pounds 170m in 1986. But that that will certainly not be achieved next year and 'probably not' in 1994.

The short term remains the key. Before provisions - anything from pounds 50m to pounds 200m - the group could make pounds 16m this year and pounds 60m next, on the more optimistic forecasts. That would still not cover a dividend maintained at 5.5p. If Mr Simms proves as good as his word, Tarmac will be one to buy when there is a hint that recovery is possible. That time has not come yet.