German slump knocks profits at RMC

RMC, the concrete and aggregates business, issued a shock profits warning yesterday, blaming bad weather and a slump in demand in the former East Germany. Profits in 1998 will not now exceed pounds 265m before exceptional items, compared with current market forecasts averaging pounds 295m and the 1997 total of pounds 308m.

The shares had already begun to slide this week in anticipation of a cautious trading statement but the severity of the warning took City analysts by surprise.

The shares which peaked at pounds 14 last summer fell 69p to 683p in early trading before closing 57p lower at 695p, wiping pounds 150m off the market value of the company, leading some analysts to speculate that itcould be vulnerable to a bid.

Analysts immediately slashed forecasts for both 1998 and 1999 by around pounds 30m. One broker now expects profits as low as pounds 257m in 1998 and median forecasts for 1999 have been cut from pounds 310m-pounds 320m to pounds 280m-pounds 290m.

A drop in demand in eastern Germany has been inevitable as the tax incentives offered to construction projects following reunification came to an end, but the speed and size of the slump has taken the company by surprise, Peter Young the chief executive said yesterday.

Demand was expected to fall by up to 20 per cent over two years but after a 15 per cent fall in the first half it has fallen a further 20 per cent in the second half and a decline in volume has led to a drop in prices.

The slump in demand in eastern Germany has begun to have a knock-on effect in the rest of Germany, which remains RMC's biggest single market. Demand has also fallen away in Israel, as a result of the continuing political uncertainty, but business in the UK has been satisfactory, demand and prices for ready-mixed concrete have been steady, and price increases have offset flat demand for aggregates.

Demand in the rest of Europe has also been satisfactory, Mr Young said, and trading results remain encouraging in the US, and especially in California.

Prospects in Germany will not become clear until the spring, but the company has merged its five German divisions into three and cut a further 230 jobs at a cost of pounds 10m. Gearing is still low at 32 per cent, however, and the company expects to maintain recent spending levels on acquisitions, Mr Young said.