Blue Circle builds on upturn

The Investment Column

There is no doubt Blue Circle has an excellent cement business and it is currently benefiting from some pretty buoyant construction markets around the world.

Even in the depressed UK, its command of half the market means it can maintain the industry's prices at a level which keeps out imports and yet still makes enviable margins of over 20 per cent.

Despite a 3 per cent dip in volumes, UK cement profits rose an impressive 1.9 per cent to pounds 65.3m last year. What Blue Circle can do when markets really take off was illustrated by last year's performance overseas. Buoyant demand in the US, Chile and Malaysia saw profit rises ranging between 29 per cent and 37 per cent in those regions.

The benefits of this general upturn in the cycle shone through in group profits, which leapt from pounds 184m to pounds 264m in the year to December, despite being complicated by exceptionals. The 1994 charge of pounds 59.4m - mostly the loss on the sale of the New World cookers business - was cut to pounds 9m in 1995.

While Blue Circle has shown it can manage the core business, its diversification strategy has been disastrous. Fresh from sorting out the Armitage Shanks bathrooms division, it is now having to tackle the bigger problems of its boilers-to-radiators heating offshoot, including Myson and Potterton in the UK. A restructuring announced last month is meant to deliver cost savings of pounds 25m by next year, but that will still leave returns well short of the targeted 15 per cent return on pounds 550m of capital employed in heating, after profits collapsed from pounds 42.4m to pounds 17.1m in 1995.

The cement cycle would appear to have a little more steam left in it. UK cement volumes have yet to show any recovery from the 10 per cent fall registered in the second half of last year, but there is good reason to agree with Blue Circle that the market will pick up later this year.

Construction orders up 20 per cent in the three months to January and recent plans by housebuilders to significantly raise output must feed through to cement demand eventually. Add to that price rises of over 4 per cent to be posted next month and there should be some growth this year.

Overseas, the US could now hit a plateau, but any decline from here is likely to be gentle. More questionable is whether last year's boom in Chile and the Far East can be maintained without attracting competition or being killed off by the onset of extra capacity. Blue Circle plans to use its minimal gearing and formidable cash flow for acquisitions. Given the record, that should worry investors.

At 333p, up 10p, the shares are fairly rated on a forward price/earnings ratio of 14, assuming profits just short of pounds 300m this year.

Next still offers

rich rewards

Next's market-beating record has become so predictable that even David Jones, the retailer's chief executive, seems to be having difficulty in finding his own results interesting. What was once the high street's great recovery story has become a tale of consistent growth that puts the rest of the sector in the shade. Pre-exceptional profits were up 25 per cent to pounds 125m with high street stores and the Next Directory putting in sterling performances. Disposals boosted the pre-tax figure to pounds 142m.

After shaving the margin to boost sales over the last two years Next is keeping the return on sales constant on like-for-like turnover that is still increasing at a heady 12 per cent since the year-end. Quite how Next is managing such increases when other retailers are struggling is not entirely clear, but the market is not arguing. Profits from the 304 stores shot up from pounds 59m to pounds 74.7m, while Next Directory managed a 25 per cent improvement to pounds 19.1m.

Having pulled out of its Bath And Body Works joint venture, which had opened five Body Shop-style toiletries stores, Next is focused on those two businesses. After notching up a loss of pounds 1m, the sale of the stake to its partner, The Limited, makes sense, as does the decision not to add to its five US stores, where one will close. More franchise openings are scheduled, however, in the Middle East, the Far East and Greece.

Even this spending will not much dent the growing cash pile, which rose pounds 50m to pounds 170m. The company has raised the dividend by 30 per cent and prefers an aggressive dividend policy rather than a special dividend or share buy-back.

It is testing a personal loan scheme to its Directory customers which is utilising pounds 10m of cash. If rolled out it might use up pounds 50m, but that would still leave a chunky war chest.All this hints at acquisitions and Lord Wolfson, chairman, admits that he likes to have the ammunition available if an opportunity came along but has no current plans. Next shares have proved a phenomenal investment over the last five years. While the FT all-share index has risen 84 per cent since 1991, Next's shares have grown 38-fold. BZW has raised its forecast from pounds 138m to pounds 150m for the current year. With the shares up another 15.5p to 494.5p yesterday, they are on a forward rating of 18. High, but rightly so with growth set to continue.

Gloom all round for Redland

Just when it looked as if Redland was recovering from the calamitous fall in its share price since the start of 1994, it is heading south again. Yesterday, the shares slipped another 8p to 384p as the market focused on a gloomy assessment of trading in pretty much all of its markets.

That was a slightly uncharitable assessment of the 5 per cent fall in pre-tax profits last year -before asset write-downs - which represented quite a creditable management performance in the face of volume declines of between 6 and 10 per cent. The pressure to cut costs will only intensify this year, however, with trading unlikely to improve until at least the back end of 1996.

Germany is the big problem, with residential building permits slumping in the West by 28 per cent during the second half of the year, more than offsetting a 20 per cent rise in the East. Both areas experienced a progressive deterioration during the year, which augurs badly for the current year since tile volumes tend to lag permits by between six and nine months.

No surprise then that the company is planning a radical overhaul of its European roof-tile businesses, merging its own operations with those of Braas, its 50.8 per cent-owned subsidiary. Unfortunately for investors, the scale of any savings remains a mystery until the company finalises negotiations with Braas's minority shareholders.

Still, at least the company is at last making decisions based on commercial rather than financial imperatives, which is more reassuring than the treasury manoeuvres of yesteryear. Getting out of bricks appears to make sense, even if it is quite a U-turn after the ill-conceived Steetley acquisition.

With first-half profits unlikely to match 1995's, full-year forecasts are being pulled back to about pounds 330m. That puts the shares on a prospective price/earnings ratio of 13. Supported by a 5.4 per cent dividend yield, they look reasonably secure but unexciting.