View from City Road: Wimpey builds some trust

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The Independent Online
'THERE are greater grounds for confidence than have existed for some time,' Joe Dwyer, chief executive of Wimpey, said. Cynics will remember that he said much the same this time last year, since when pre-tax losses have jumped from pounds 16.1m to pounds 112.4m, the loss per share has risen fivefold to 39.42p and the dividend has halved to 5.25p.

This year, there is more substance to his optimism. Wimpey's housing sales since the start of the year have risen by a third. If that trend continues, it should comfortably meet its target of increasing volumes - 6,380 in Britain last year - by 1,000.

In minerals, President Clinton's infrastructure plans may take some time to feed through to increases in volumes and prices, while the market in Britain is likely to remain flat. But Mr Dwyer is confident that cost-cutting will boost the division's profits, down from pounds 21.1m to pounds 4.3m last year. Improvements in these two divisions should be enough to outweigh the slippage in contracting, where, despite concerted efforts to boost international business, prospects remain bleak.

Generous provisioning should ensure that it can increase profits. Exceptional write-downs increased from pounds 46.4m to pounds 113.8m, including pounds 37m ( pounds 30.4m) on housing land. That helped cut its average plot cost in Britain from pounds 13,000 to pounds 11,500, underpinning Mr Dwyer's hope for an improvement in margins.

More controversial are its pounds 52.8m provisions for rental guarantees and interest rate swaps, which will effectively transfer about pounds 15m of costs from the profit and loss account to the balance sheet, although the cash cost remains.

Fortunately, it has worked hard enough on its balance sheet - albeit by shrinking the business - to ensure that the provisions do not push gearing through the roof. In 1992, net debt fell from pounds 206m to pounds 136m so, despite the fourth consecutive fall in net assets, gearing declined to 30 per cent. That was thanks to pounds 177m of disposal proceeds, mainly from the Little Britain office development in the City. Mr Dwyer is confident he can raise a further pounds 180m but, without that, there will be a pounds 50m outflow this year.

Property apart, the contraction of the business is now largely complete. The question now is where, and how, the group expands. Mr Dwyer wants to boost assets employed in minerals from pounds 216m to pounds 350m as the market improves, implying a sizeable acquisition. Plans for expanding housing volumes will need extra capital, while cash flow from contracting is likely to remain negative this year and next. Mr Dwyer asserts that Wimpey's balance sheet is robust enough to take an increase in borrowings, but the City is convinced that it will be looking for cash within the next year.

Forecasts of pounds 24m for the current year put the shares, up 8p at 133p yesterday, on a multiple of 16.6, underpinned by a 5.3 per cent yield on a maintained dividend. That is moderate enough to make it worth trusting Mr Dwyer's optimism.

(Photograph omitted)