Bottom Line: Cynics gaining the upper hand

MARLEY'S shares have fallen almost a third since the beginning of the year and are now worth no more than in early 1992 at the bottom of the recession. Yesterday they fell a further 6p to 149p.

That might be a harsh reaction to a 48 per cent increase in underlying interim pre-tax profits from pounds 13.2m to pounds 19.5m and the promise of a return to dividend growth at the year-end after the maintained 2.1p interim payout. But behind the bright figures lie some worrying trends.

Unlike in the early 1980s, when house owners were happy to cash in some of the equity in their homes to fuel a buoyant repair and maintenance market, all Marley's first-half growth came from new house building.

That has two drawbacks. It indicates an unwillingness to spend that could prove house builders' optimistic expectations wrong and curtail the house building boom next year. It also means prices for Marley's flooring and plumbing products are likely to remain subdued.

South Africa will improve once the celebrations end and the serious rebuilding begins. In the UK, a second round of price rises last month in building materials should stick, Europe is recovering quickly, the cost base is well under control and gearing is down.

Yesterday's share price movement, however, suggests that the cynics are getting the upper hand. A planned pounds 150m of acquisitions arguably implies a need to buy growth in soggy markets. And having come out of the recession reasonably early Marley will go to a discount sooner than most.

With analysts pointing to pounds 46m this year and pounds 55.5m next, the shares stand on a p/e ratio of 14 falling to 11.6. That is a small discount to the sector and an even slimmer one to the market. High enough.