RMC homes in on further growth

The Investment Column

Any company that issued a profits warning just seven months after raising pounds 489m to finance a spending spree would normally set alarm bells ringing among investors. But there are mitigating circumstances for RMC, the world's largest producer of ready-mixed concrete. The group has an excellent track record and there are good grounds for believing that growth will be resumed after a blip in 1996.

The rather gloomy short-term outlook makes RMC's record 1995 figures yesterday rather academic, although they do highlight the sheer quality of the company. Underlying profits before exceptionals jumped 16 per cent to pounds 329m, despite a weakening of demand and lower volumes in Germany and the UK, RMC's two biggest markets.

The UK industry is showing much more restraint than it did in the dark days of 1992, when a price war meant RMC made just pounds 10m on pounds 1bn of turnover in its home market. Despite a 6 per cent fall in ready-mixed volumes in 1995, price rises of a similar amount and lower costs meant margins improved last year.

Based on better trading over the past month, RMC is optimistic the second half should show the UK housing market bouncing back from last year's destocking and the prolonged winter that prompted the profits warning.

More important is what happens in Germany, which contributes 52 per cent of group profits, but which was flat in local currency terms last year. Quite apart from the weather, the outlook there remains decidedly cloudy, as yesterday's decision by the Bundesbank to cut rates acknowledges. Last year's 13 per cent fall in housing permits will have a follow-through effect on 1996. The downturn comes just as RMC is completing the pounds 300m refurbishment of its Rudersdorf cement works in eastern Germany and hot on the heels of its pounds 367m purchase of the minority in its ready-mix operation there.

But RMC's acquisition cost of eight times historic earnings should take account of the position in the cycle when making the acquisition, while Rudersdorf should be protected short-term by the booming Berlin construction market, to which it is adjacent.

RMC is confident the strength of the local market means it can outperform German industry forecasts of an 8-10 per cent fall in volumes this year. And if bad weather and lack of confidence restrain Europe this year, RMC's non-European operations in America and Israel continue to forge ahead.

Year-end gearing of 31 per cent means RMC could add to its aggregate interests in the UK, although it was playing down prospects of a bid for either Camas or Bardon yesterday. Profits cut to pounds 300m this year would put the shares, up 2p at 1,052p, on a forward multiple of 15. A firm hold.

New shapes at Laura Ashley

The Ann Iverson factor continues to boost Laura Ashley shares, which have doubled since the straight-talking American joined as chief executive last July. They rose another 11p to 175p yesterday as the market responded to a pounds 10m profit for the year to January, reversing a loss of pounds 30m the previous year when the figures were hit by heavy restructuring charges.

The company says the Laura Ashley turnaround will take two to three years and there is a danger that the shares are running ahead of themselves, but the building blocks of a genuine recovery are gradually being put in place.

The plan to expand the group's sales in home furnishings to two-thirds of total sales and reduce the garment element looks interesting. Meanwhile, the proposal to open more stand-alone furnishing stores and expand the amount of space devoted to sofas and wallpaper should yield higher returns, particularly as the group's home furnishings production is far more efficient than its garment-making.

The store portfolio is being re-shaped, with smaller stores being closed and replaced by larger outlets which can show a wider range of the home furnishings on offer.

Manufacturing is also being radically overhauled. Finance director Jim Walsh says the group's manufacturing plant in Wales had "lost touch with economic reality", with horrific levels of seconds and utilisation running at a lowly 70 per cent. The 1,100 jobs in the Welsh operation will fall to around 700 over the next three years. Cost savings of pounds 2m-pounds 3m are expected, but a sale or closure is not ruled out.

The supply chain and distribution system are also being put under the microscope, as are selling prices, which Ms Iverson says were too high.

The mail order business, which was reined back sharply in 1995 after a disastrous year, is being relaunched.

The dividend of 0.5p is a demonstration of confidence only partly borne out by current trading figures, which are strong in the UK but have fallen in the US and Europe. Analysts are forecasting profits of pounds 16m this year, which puts the shares on a recovery rating of 36. So far so good, but the prospects are already in the price.

Fisher offloads

the losers

Stephen Walls' tenure at the helm of Albert Fisher, the food group, has been punctuated by large exceptional charges as he has struggled to reshape the business away from low-margin, "commodity" areas. Thus far, the shares have resolutely failed to respond to the Walls treatment. Even after yesterday's 2.5p rise to 48.5p, they have underperformed the rest of the market by 47 per cent in the three years since he added executive duties to his chairman's role.

The hope is that yesterday's announcement of a new bout of disposals and write-offs will re-establish Fisher on the growth track. The biggest hit comes with the decision to withdraw from the German wholesale produce business, which will result in a pounds 42.8m exceptional charge this year. The group also revealed that it was discussing the disposal of a majority stake in its North American distribution business and its joint lettuce- growing venture.

Together, the three disposals will remove profits which totalled pounds 3.6m last year and, Fisher revealed yesterday, turned in losses of pounds 4.5m in the latest six-month period to February. The deficit on discontinued operations held operating profits broadly level at pounds 23.3m in the first half, while the exceptional items plunged the group to a pre-tax loss of pounds 24m, reversing profits of pounds 12.6m last time. Analysts drew some comfort from the fact that Fisher held the half-way dividend at 1.85p.

Fisher operates in difficult markets and the four-fifths growth in first- half profits from European food processing bears out its strategy of concentrating on value-added areas. The moves should help narrow the focus of the business but its remaining fresh produce and seafood operations remain prone to the vicissitudes of nature and big store groups. Profits of pounds 41m before exceptionals would put the shares on a forward p/e of 12. Fair value.