Blue Circle rides out stormy markets

The Investment Column

Blue Circle, the cement, heating and bathrooms group, at last seems to be perfecting the ability to ride out the wildly different markets in which it operates. In the mature UK cement market, which it dominates, the group suffered a further 6.7 per cent fall in volumes in the first half of 1996, only beating the market average by a percentage point or so because of exports. By contrast, cement volumes jumped 26 per cent in Malaysia in July and in Chile Blue Circle managed to sell 48 per cent more ready-mixed concrete in the first six months of the year.

So a 12 per cent rise in pre-tax profits to pounds 116m in the half year to June, on turnover up just 4 per cent, was a respectable result. The group is also making a decent fist of tackling stagnant building markets in Europe.

The biggest boost to the figures came from the boilers and radiators business, which was hammered by weak European housing markets last year. Cost savings from the pounds 55m restructuring announced at the end of 1995 delivered all of the bounce in operating profits from pounds 100,000 to pounds 9m in the half year, although the comparison was flattered by one-off charges last time. With the German boiler and radiator market down 10-13 per cent, the trading environment is not propitious, so the full pounds 25m benefit of the expected efficiencies will be important in the 1997 figures.

In the UK cement business, Blue Circle is dealing with maturity head on through a pounds 330m investment programme. While adding no new capacity, the new plants should improve efficiency. If they come near the target return of 10 per cent they should double last year's pounds 24m operating profit, which fell from pounds 30.4m in 1995.

But the real growth story lies overseas. The US continues to power ahead, with the 5 per cent uptick in the market in the first half showing no sign of slowing in the aftermath of the construction boom surrounding the Atlanta Olympics. Profits up from pounds 21.2m to pounds 25.1m have overtaken the UK and, with further price rises in the offing, the background seems set fair for Blue Circle's planned 600,000 tonne capacity increase.

The US is just one area where the group is seeking to use its firepower for acquisitions. Even with pounds 500m or so of capital investment planned over the next four years, minimal gearing means it could have pounds 400m to spend on purchases in areas like the US, Argentina, India or South-east Asia.

However, a repeat of Chile or Malaysia and Singapore, where profits soared 58 per cent, might be difficult, given the number of rivals with deep pockets planning a similar course. Meanwhile, profits of pounds 300m or so this year would put the shares, down 3.5p at 373p, on a forward rating of 16, which looks high enough for now.

Speculation at Yorkshire-TT

A sparkling set of interim results from Yorkshire-Tyne Tees was overshadowed yesterday by speculation about the future of the ITV licence holder. The question which continues to tease observers concerns the intentions of fellow-broadcaster Granada, which has a 24 per cent stake in YTT.

Analysts and investors are in little doubt that a takeover is coming, hence the whopping premium at which the shares are trading. Yesterday's announcement of an 80 per cent jump in first-half profits to pounds 13.3m came despite disappointing returns from advertising. The group's share of national advertising revenues languishes at around 10 per cent, well down on its historic high of 14 per cent.

But programme sales more than than made up for lacklustre advertising and cost cutting has continued. Emmerdale, the well-known soap, has gone to three episodes a week, while YTT has been contracted to supply three made-for-TV films for the US.

But the real story remains with Granada and what it does next. There have been several informal discussions between Gerry Robinson, chairman of Granada, and Ward Thomas, chairman of YTT, about how an agreed deal might work, and at what price.

Yesterday's 22.5p fall in the share price to pounds 12.15 was based on the highly unlikely assumption that the company will announce a rights issue to pay for acquisitions. That looks far fetched. Even after yesterday's drop, the shares remain on a stratospheric rating, reflecting not just takeover prospects, but the likelihood that the huge licence fees paid by the two YTT ITV companies will come down during the re-negotiation scheduled for 1997/8, and the probability that YTT's share of advertising revenues will come into closer balance with the region's demographic and consumer profile.

So how much will Granada have to pay? Full-year profits are likely to exceed pounds 28m, putting the shares on a forward multiple of 36 times 1996 earnings. The expectation is that Granada could afford up to pounds 14 a share, and still avoid earnings dilution. The nervous should lock in profits and sell now, but those with a more robust constitution will hold on.

A question over timing at IMI

On the face of it, IMI's recent reshuffling of its business portfolio looks abysmally timed. At the beginning of the year it paid pounds 134m for Heimeier, Germany's biggest maker of thermostatic radiator valves, just as the German construction market all but shut down. It followed that up in February by offloading its titanium metal business on to Titanium Metals Corporation, the biggest US producer, just as orders soared at the jet engine builders which represent one of the biggest customers for the metal.

But IMI chief executive Gary Allen remains sanguine, pointing out that the asset swap replaced a business which lost pounds 6.5m in the first half of last year with one which made pounds 8.1m in very difficult markets this time.

The shake-up distorted half-time results to June, which saw pre-tax profits soaring from pounds 49m to pounds 138m. Stripping out pounds 70.8m of disposal profits, underlying profits were 37 per cent ahead.

Much of that was due to Heimeier's maiden contribution to the copper pipes to valves building products division, which soared from pounds 16.9m to pounds 23.7m. The business was hit by the harsh winter and difficult markets on the Continent. Even adding back a pounds 500,000 loss on copper stocks, profits in the original operations were down pounds 800,000.

But IMI says recovery is in sight for the UK housing and German repair and maintenance markets. With gearing cut to 9 per cent, the group is looking at acquisition prospects in Europe and the US for its fluid power pneumatic components arm.

Full-year profits of pounds 139m would put the shares, down 16p at 380p, on prospective p/e ratio of 15. Fairly rated.