Building group is back on firmer ground

COMPANIES that cut their dividend do so at their peril. When Redland, at 418p, one of Britain's biggest building materials groups, slashed its payout by a third last year, reaction among investors was swift.

"Redland has destroyed shareholder wealth in the last five years by issuing too much paper, overdistributing its earnings and focusing overly on Treasury matters," was the verdict at the time from brokers NatWest. "Effectively, the group has consumed rather than created shareholder wealth."

Others blamed Redland for doing too little too late, and only after a new top management had been brought in to carry out a strategic review.

The effect of all this in stock market terms was predictable enough, with the shares losing almost a third of their value in a little over seven months.

But recently Redland, under chief executive Robert Napier, has been somewhat rehabilitated. It has been helped in part by a reassurance from its new chairman, Rudolph Agnew, that the dividend was sacrosanct, and by falling interest rates in Germany, where the bulk of group profits are struck. The shares even emerged relatively unscathed from a profits warning last month.

What has encouraged investors most are signs that deep-rooted structural problems are being addressed.

Foremost among these is the need to correct a historic cash-flow imbalance. In an unusual arrangement that has existed for more than 40 years, Redland receives an annual cash dividend from Braas - its successful German roof tiles subsidiary in which it has a 50.8 per cent equity stake. The rest of Braas is held by two family trusts.

While the British housing and construction markets have been stuck in deep recession for a long time, Germany - and Braas - have gone from strength to strength on the back of a post-unification building boom in its private and public sectors.

Last year, profits from Germany leapt from pounds 150m to pounds 195m to account for just over half of Redland's total operating income. But the sudden downturn in the German housing market has left Redland looking horribly exposed, and last week Braas revealed its turnover had fallen by 4.7 per cent to DM2.2bn (pounds 950,000) in 1995.

To overcome this heavy dependence on Germany, Redland is looking at ways to free capital and concentrate on roofing markets outside Europe, which have greater growth potential. Talks are under way to inject all or part of Redland's European tiles business into Braas, already the market leader in Europe, in return for cash or shares. But Braas family members are thought to be reluctant to agree to Redland increasing its stake beyond 60 per cent, so discussions are likely to be protracted.

As part of the same strategic review, announced earlier this month, Redland has also hung up a "for sale" sign outside its bricks businesses, which could raise about pounds 250m. The first step in this disposal programme was announced on Friday when Redland said it was selling a 35 per cent cent stake in Terca, a Benelux subsidiary, to fellow Belgian brick maker, Koramic, for pounds 71m in cash.

The sale of UK bricks division - the third largest in the UK with a 17 per cent market share - is expected as early as next month with Austria's Wienerberger and Ireland's CRH among the frontrunners. But such a deal may only increase an Advanced Corporation Tax liability caused by a shortage of UK earnings.

One way round the conundrum would be if the cash from the bricks sale was used to expand its domestic quarrying activities - this strategy was borne out on Friday when Redland announced a hostile pounds 5.8m bid for Ennemix, the troubled Nottinghamshire aggregates group where it picked up a 29.9 per cent stake before Christmas.

Redland certainly does not need the money to bolster the balance sheet as net debt of just over pounds 500m is a comfortable 35 per cent of shareholders' funds.

Whatever the outcome, the restructuring of the European roof tile business and the proposed sale of its brick operations make for an interesting year.

But it may be that Mr Agnew, a veteran of many a bloody bid battle, has not fought his last fight. For if these overdue initiatives fail to unlock value for shareholders there is a serious chance somebody else will come along to try and do it for them.

Redland's equity is widely held among 50,000 shareholders, and after last year's dividend decision their loyalty to the board would surely be in question if a hostile bid were launched.

That prospect, and hopes of an eventual recovery in the European housing and construct-ion markets, could well make the lowly-rated shares attractive to the more speculatively minded investor.