Bottom Line: Mowlem has sold its best recovery hope

SELLING its plant hire subsidiary HSS to the Davis Service Group for pounds 52m may have solved one of John Mowlem's problems by generating a pounds 12m surplus and cutting gearing from 39 to 9 per cent. But in the process Mowlem has sacrificed its most promising business and considerably depressed its prospects for recovery.

Last year's figures brutally underlined the group's difficulties. The 2p final dividend gives total dividends of 4p, a shadow of the 10.5p paid in 1991. A tiny operating profit of pounds 3.6m ( pounds 19.3m) was obliterated by interest charges of pounds 10.8m and pounds 20.2m of exceptionals - pounds 9.3m in redundancy costs, pounds 5.2m of property write-downs and a pounds 4.7m provision for a payment the company was owed by Olympia & York, the collapsed Canary Wharf developers.

The resulting pounds 27.2m pre-tax loss (1991: pounds 4.3m loss) would have looked even worse had the company reported under FRS3, since Mowlem also made a pounds 9.6m extraordinary charge for pulling out of its North American scaffolding and commercial property interests.

Given that interest charges were rising steeply, despite low interest rates, as a lower volume of business ate away at the deposits placed with it by customers, Mowlem had little choice but to sell HSS.

But what is left hardly looks attractive. True, John Marshall, the managing director, had a cautiously upbeat tale to tell on housebuilding, where the first quarter of this year has shown reservations up by a third. But housebuilding generated barely pounds 48m of Mowlem's pounds 1.3bn turnover last year.

Mowlem's hopes are therefore pinned on a recovery in its contracting and scaffolding businesses, since only the most farsighted investor would see the day when the company's investment in London City Airport will produce profits.

In 1992 contracting and scaffolding accounted for pounds 904m and pounds 269m of Mowlem's turnover, generating pounds 6.9m and pounds 5m of operating profit respectively. SGB, the scaffolding business, has seen a slight improvement in the UK, where the group was loss-making last year. But as Britain picks up France, which was responsible for helping the division scrape into profits, is sliding into recession.

Contracting is an even more questionable area. A bounce in the UK economy may assist, but it will also add to pressure on costs.

One to sell if you are unlucky enough still to have the shares, which closed up 3p yesterday at 88p. Investors would be better off buying shares in Davis, which appears to have got the better of the deal.