Bottom Line: Bull market keeps Tarmac on target

TARMAC'S decision to float the bulk of its industrial products division says as much about the current euphoria in the stock market as it does about the group's efforts to refocus its business.

The ragbag of companies that will make up Ruberoid have had a 'for sale' sign over them since Neville Simms took over as chief executive in February 1992. But buyers - at least those prepared to offer an acceptable price - have clearly been thin on the ground.

Trade sales would doubtless have been possible had Tarmac been prepared to wait, but Mr Simms had made himself a hostage to fortune by promising pounds 300m of sales by the year-end.

What luck, then, that the raging bull market has come along to rescue him. Tarmac has presumably sounded out investors and is confident of sufficient interest to get the float away, although the fast timetable suggests it knows the advantages of acting quickly.

That will be an impressive feat. Based on estimated pre-tax profits of pounds 5m, Ruberoid must be floated on a multiple of more than 21 times 1993 earnings, a 30 per cent premium to the market, to achieve the pounds 70m needed to lift Tarmac's disposal tally above pounds 300m.

The building cycle is undoubtedly at or near the bottom of a deep trough, but that multiple is still factoring in a lot of recovery - particularly when much of its business is dependent on the heavy contracting side with a significant exposure to Europe.

That may give pause to potential Ruberoid investors, but it need not worry Tarmac shareholders. Although accounting rules mean there will be a nasty goodwill writeback against profits, the deal will marginally increase net assets and should do no harm to earnings. It will also complete Mr Simms' restructuring programme, leaving investors to focus on the prospects for the three core divisions - quarry products, housebuilding and contracting.

It will also focus attention on Mr Simms' ability to grow the business. His efforts at shrinking it have been mixed - the Econowaste sale was a disappointment, the success of the pounds 215m rights issue was due more to the market's optimism than his efforts and the Ruberoid float looks opportunistic to say the least.

It has improved the balance sheet, leaving gearing at around 30 per cent. But, at 12.1 times 1995 earnings, the rating leaves little room for further errors.