Weakness in housing disappoints Tarmac

Analysts in confusion over building company's strategy
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The Independent Online
Tarmac warned yesterday that a weak housing market in the second half had resulted in fewer completions than hoped for. But Neville Simms, the chief executive, said that strong performances from quarry products and building materials had made up the shortfall and profits for the year to December would be in line with forecasts.

Playing safe with new Stock Exchange guidelines on disclosure of price-sensitive information, Tarmac made the statement so it could brief analysts more fully on last year's trading.

Warburgs now expects pre-tax profits of £105m for the year just finished and £145m for 1995 as Tarmac continues its recovery from the heavy losses of the last two years. The shares slipped 3p to 116p.

At that level they have lost 43 per cent of their value since they and the rest of building sector peaked in March.

Building companies were one of the worst-performing sectors on the stock market last year as the housing market lost its early momentum and construction, which always recovers late in the economic cycle, remained weak.

Analysts remain confused about Tarmac's strategy now that the difficult but obvious work of cutting debt after the expansion binge of the late 1980s has largely been completed.

One described the company as a building conglomerate and questioned why investors would choose Tarmac in place of more focused businesses or those with clearer growth prospects.

One of the company's problems is its relatively small exposure to Europe, where other building companies such as RMC and Redland are finding growth. Although experiencing cyclical recovery, the UK construction market is considered to be in long-term decline as a proportion of the economy as a whole.

Despite a fall in housing completions in 1994 from 7,333 to 6,267, Tarmac seems unwilling to take housing overseas, having pledged to keep the amount of capital tied up in the division limited to 25 per cent.

In the UK, growth from building homes will be limited by a low-inflation environment, which is keeping the lid on the market. As a result of the market's confusion, Tarmac's shares languish on a prospective p/e ratio of only 10.5., lower than the sector average, and discounting the peak of the current cycle in two or three years' time.