City File: Tarmac on an uphill road

SELL Tarmac. That has to be the verdict after the way in which its housing division has been hit by the rise in interest rates. Although the shares have a comforting 5.5 per cent yield, that payment was not covered by last year's profits, so much hangs on the group's ability to cover it this time round.

According to the broker Albert E Sharp, Tarmac's core civil engineering division faces continued competitive pressures, which the interest-rate hike and its likely successors will not help. Neville Simms, chief executive, is working manfully to turn Tarmac round. But it will be worth standing aside a little longer yet.

THE CITY is taking sides over the newly quoted private bus operators. Broker Panmure Gordon applauds last week's inaugural full-year results from the North-east's Go- Ahead Group, while Smith New Court likes Badgerline, due to announce interims tomorrow.

Badgerline, at 114p, should confirm its prospective earnings multiple of 12, while Go- Ahead, at 143p, is a shade richer at 13 times expected profits of pounds 6.1m.

Go-Ahead has won the coveted prize of London Central Bus, while Badgerline has stayed out of London, preferring to pick up companies in the Midlands and elsewhere. But London Bus promises to be a competitive market. Buy Badgerline for the longer haul.

SHARES in Barry Wehmiller International should be near the bottom of their cycle when the company reports results for the year to July on Thursday. Analysts expect profits to slip from pounds 7.1m to around pounds 5m, but then to recover to pounds 6.8m in the current year.

At 144p, the shares are just 6p above their 1994 low, where they carry a 5.8 per cent yield. That looks safe, and puts a prop under the price. Buy.

IS THERE a stratagem for Stratagem Group? The mini- conglomerate has been bewildering its followers with a chain of deals typical of the breed. However, all should become clear when results for the year to August are revealed next month.

The group has digested two troubled acquisitions, the Touchstone computer services firm and the industrial door maker Harrison Industries. Although more acquisitions will make future comparisons difficult, the signs are that Stratagem's pre-tax profits are set to take off, rising from pounds 1.9m in the year just ended to more than pounds 5m two years hence, as it reaps the cyclical upturn.

At 137p, yielding 4.5 per cent and only 14 times earnings, the shares take little account of the potential. Buy.

NEVER underestimate the small-ticket retailer - and they don't come much smaller-ticket than the 700 T&S Stores, newsagents and tobacconists that trade under Gibbs News, Macs, Supercigs and Dillons.

Cigarettes and newspaper sales are likely to be under pressure, from cancer scares and price wars respectively, but sweets, snacks, stationery and magazines could begin to move ahead as the economy revives. Small treats are the first to benefit from such trends.

Recent interim profits were flat, but the run-up to Christmas could take annual profits up from pounds 12.6m to over pounds 14m, putting the shares on a prospective earnings multiple of around 12 at 181p. A good bet.

IF YOU like a fat yield, try the Hepworth building materials group. Profits are moving ahead nicely, which should lock in the 6.4 per cent yield at 295p. Buy.

THE Filtronic Comtek flotation, signalled last week, will mark the first time that Panmure Gordon has worked with the capital markets end of its American parent, NationsBanc. Because a growing proportion of this cellular telephone components maker's business will be in the US, NationsBanc is marketing the stock to US institutions eligible to take part in UK flotations.

Unusually, Filtronic's management is holding on to a large chunk of its shares, adding to the potential scarcity. The company is dependent on four big customers, led by Motorola and AT&T, making it likely that one of them will eventually buy it out. Worth buying at up to 25 times earnings, when the marketing begins this month.

ENGLISH China Clays shares have been the subject of a tug of war lately, as investors have debated the group's ability to make something out of its Calgon takeover in the US.

The jury is out, but the company is hardly a gamble. It is cash-generative and cost- critical, and is running down its housing landbank. Calgon operates a range of speciality chemicals businesses, ranging from water treatment to shampoo ingredients.

They are competitive markets, but ones that continually yield profitable niches to innovative managements.

The shares at 363p are 40p above their 1994 low and 80 below the high. The prospective earnings multiple is a demanding 15, providing this year's profits move from 1993's pounds 88m to around pounds 100m. That will protect a 5.5 per cent yield.

(Graph omitted)