Watts hit by German winter: The Investment Column

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The Independent Online
Watts Blake Bearne, the world's biggest miner of ball clay, yesterday became the latest building materials group to blame Germany for disappointing results. Severe winter weather meant the group, whose specialist clay is used to make lavatories, sinks and tiles, had an almost non-existent first quarter in Germany.

The flat trading was compounded by previous overstocking of tiles by Italian producers, which led to a fall-off in demand for the German raw material. Together, the problems accounted for the dip in pre-tax profits from pounds 6.11m to pounds 5.47m in the half-year to June, marring a four-year run of good results since Watts emerged from the recession in 1991. The shares accordingly dipped 5p to 510p yesterday.

It was not an auspicious start for new chief executive Graham Lawson, who moved over from RTZ to take the reins a year ago. Some may also question his July decision to add to the group's reserves in Germany, where it already controls 45 per cent of the market. But Mr Lawson shows an impressive command of the business and the new assets should help consolidate the position of what is a genuinely unique group.

As well as its commanding position in Germany, Watts claims 60 per cent of the UK market and 30 per cent in North America. The core Devon Clays operation did well to raise its profits, albeit marginally, in view of the difficulties faced by others involved in building materials. It was helped by business won in unlikely new markets, including Lebanon, Turkey and Iran.

Meanwhile, higher profits in the US suggest the business there is on the mend. Plans to sell one or two of the five sites across the Atlantic will continue the good work, although margins remain less than half the UK level.

The more exciting prospects, however, lie in the Far East, which Watts has just re-entered with a joint venture in Indonesia. Growth rates there and in Malaysia are typically in double figures as prosperity seeps out to the wider population. But the prospects are reflected in a forward multiple of 17, assuming profits of pounds 10.2m this year, while a full bid from the private Belgian group Sibelco, which holds 49.6 per cent, looks unlikely.