Wolseley is built to last

Veteran followers of Wolseley plc, the heating, plumbing and building materials group, mourned the passing of an institution a few weeks ago: Jeremy Lancaster, the Wolseley chairman and renowned doom-and-gloom merchant, who retired to take over the reins at packaging firm Rexam.

Wolseley results always came with Eeyore-like pronouncements, reminiscent of AA Milne's depressive donkey, from Lancaster about the parlous state of the building materials market, the trading difficulties caused by economic downturns abroad, currencies and the like. Yet there was rarely, if ever, a blip in the group's own impressive financials. In his 20-year reign as chairman, profits exploded 60-fold from pounds 4.5m in 1976 to pounds 245m in 1995. Wolseley was, in the eyes of investors, the Rolls-Royce share of the building trade.

Finally, this year, there was some substance to Lancaster's doomsaying. Wolseley announced half-year profits down by 5 per cent to pounds 111m, with underlying trading profits hit by 12 per cent, and issued a profits warning for the full-year results, due out in October. Lancaster said that the UK housing market would not recover in time to pull profits up to last year's level.

The shares were subsequently depressed further by a pounds 68m placing to raise funds for acquisitions; then, in May, the company entertained then pulled out of a pounds 400m offer to buy up Meyer, owners of Jewson, a rival chain.

Having always dismissed Lancaster's depressive statements in the past, investors started taking them seriously again, and looked with Eeyore's eyes at the 40 per cent of sales Wolseley derives from its US operations.

They even began to question the company's insistence on maintaining its electrical and photographic supplies manufacturing arms, which were cash- generative but hardly growing.

From inheriting the Rolls-Royce when their appointments were announced last October, Lancaster's successors, Richard Ireland and John Young, non-executive chairman and chief executive respectively, would now appear to be looking instead at a rusting Rover.

However, the truth may turn out rather differently. Despite the bad press, Lancaster has left behind a company in very strong shape. It is the world leader in heating and plumbing supply, and has a market-leading 8 per cent of the UK building merchants' market through its Plumb Center bathroom supplies subsidiary. Its balance sheet has the kind of cast iron qualities that have drawn praise even from arch-sceptic analyst Terry Smith, who praised Wolseley's refusal to use deferred tax to manipulate its profit and loss account in the updated version of his book Accounting For Growth.

While its rivals were coughing and spluttering through the worst construction downturn since the war, Wolseley powered ahead, recording profit increases in 1992, 1993 and 1994 of 14 per cent, 33 per cent, and 67 per cent respectively. With another hike of 21 per cent in 1995, and only a small portion of this coming from acquisitions, it is little wonder that the profits engine finally ran out of fuel this year.

The blot on Wolseley's profit record also gives the new management team of Ireland and Young, both internal appointments, something to work on.

Lancaster's refusal to partici-pate in the usual round of media interviews, and to give but the bare minimum of financial information at results time, has resulted in a very low profile for the company, and one that Ireland and Young could easily fix. A well-conceived, profile-raising campaign alone would put some life into the shares.

In the medium term, they will be expected to splash out on a big acquisition - one which will require much more cash than the pounds 68m raised through the placing in April.

They could either look for another acquisition in the US to go with its Carolina builders or Familian Northwest distribution units, or bite the bullet in the UK and buy out one of its rivals.

This last plan would cheer the market up even more, since they see the sector as badly in need of consolidation, and the management team at Wolseley as by far the best of the bunch. Quite why the Meyer deal was not consummated, after initial talks had taken place, is a mystery: the sticking point was probably just price.

For now, the new guard at Wolseley will have to live with an unfamiliar situation: a predicted fall in profits for the full year, forecast to be around 2 per cent off the 1995 figure, or pounds 240m. It is unlikely to last. When the housing boom filters through to the building trade, Wolseley will once again be well placed. Lancaster's Eeyore impression will not be missed for long, but his legacy will serve his successors well.