View from City Road: Wolseley turns in a surprise

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WOLSELEY'S 14 per cent rise in profits to pounds 91.3m took everyone by surprise - hence the 64p rise in the shares to 408p. Even Jeremy Lancaster, chairman of the UK's largest building materials and heating distributor, was taken aback. 'We were not expecting results as good as these,' he said.

He was not alone, as analysts were expecting profits of about pounds 70m.

While trading at Wolseley's flagship UK operation, Plumb-Center, remains grim, the sudden profit improvement is put down to the recent upturn in North America's East Coast economy. There was also an excellent, if unexpected, initial contribution from Brossette, the French subsidiary bought for pounds 95m in February.

Behind it all seems to be the strength of Wolseley's management, which one of the company's followers described yesterday as 'formidable'.

Such praise is often the kiss of death, but the track record suggests Wolseley's success is down to judgement and not luck.

The strategy seems to be to edge forward gently. Gearing is modest at 17.2 per cent of shareholders' funds, down from 19.5 per cent, so Wolseley could afford to build on its French and US successes with further acquisitions.

In difficult economic times such conservative management rightly wins friends in the City, as will the final dividend of 9.45p (9p), bringing the payout for the year to 12.55p, an increase of 3.7 per cent over last year. The dividend was covered more than twice by earnings.

Yesterday's share price rise should be maintained. It brings the shares back in line with the rest of the market after a lull in performance since the spring, when worries - now proven groundless - about the full- year outcome emerged.

They outperformed in 1990 and 1991 and look set to resume their former buoyancy with profits next time forecast at between pounds 100m and pounds 110m. This would put them on a respectable multiple of about 14 times prospective earnings, compared with an average of 12.7 times for the industrial sector. The premium is deserved.

Even though there is no sign of an improvement in the UK operations, profits growth overseas should more than compensate until the good times return at home.