Blue Circle ready for pounds 400m buying spree

BLUE CIRCLE, the UK's largest cement maker, is set to go on a pounds 400m acquisition spree to boost its presence in emerging markets.

The chief executive, Keith Orrell-Jones, said yesterday that a slump in the group's profits in the crisis-ridden Asian and Latin American economies would not halt Blue Circle's expansion in the developing world. He hinted the group would spend a large part of its war chest in South America, where it owns a large Chilean cement maker. The company was also looking at bolt-on acquisitions in Asia, where it spent more than pounds 700m on acquisitions last year.

Mr Orrell-Jones said Blue Circle would consider investing in developed markets, particularly the US where demand for cement is set to boom thanks to multi-billion dollar infrastructure spending. However, he warned that high valuations of US companies made it difficult to buy in America.

The chief executive said that competition issues ruled out acquisitions in the UK, where Blue Circle controls over 40 per cent of the market.

News of the expansion drive came as the company quashed speculation that it would sell its UK heating business, which has long been seen as non- core. Mr Orrell-Jones did not rule out a sale in the future, but said he was not in talks with potential buyers.

Some analysts took a dim view of Blue Circle's expansion plans. "They need to achieve a balance in their investment. I would be loath to see another pounds 400m going to emerging markets," said Kevin Cammack at Merrill Lynch.

The City's fears were backed by the 1998 results, out yesterday. Profits before tax and exceptionals fell by 7 per cent to pounds 317.6m on turnover marginally down to pounds 2.3bn. The figures halted the stock's good run, sending the shares down 4.5p to 363.25p.

The figures were driven by a collapse in profits in Malaysia, the Philippines and Chile. In the Asian countries, economic turmoil caused a 72.4 per cent slump in profits to pounds 8.8m.

The Far East's woes prompted a 32 per cent fall in profits at the Chilean operations, heavily reliant on exports to Asia.

The chief executive said that in 1999 Asia was expected to show some recovery, while the near-term prospects of the Chilean business could be affected by the UK government's decision to extradite the former dictator, General Augusto Pinochet, to Spain.

The UK business had a resilient year, with profits 11 per cent higher at pounds 75.8m as inflation-busting price rises were offset by a decline in volumes.

Mr Orrell-Jones said that, although UK sales would remain flat in 1999, Blue Circle would benefit from a pounds 12m cost reduction from the planned closure of two quarries in Ipswich and Plymouth with the loss of 250 jobs. The saving, which comes after this year's pounds 18m cost cut, puts Blue Circle on track to meet its target of a pounds 50m reduction by 2002.

For all the cost cutting, the mature domestic market will not fuel Blue Circle's future earnings, and growth will have to rely on Asia. Mr Cammack said: "For real growth you have to look at Asia and the truth is that growth is not going to arrive this year and probably not next year either."

On Mr Cammack's 1999 earnings forecast of pounds 320m, the shares are on a 12 times multiple. They are worth holding until Asia recovers, but for the moment there is better value elsewhere in the sector.