BUSINESS OPINION:THINGS SEEM to be going from bad to worse at Readymix and at a rate that appears more than a little ahead of the general slowdown in the construction sector.
Last week, the company came out with a detailed profit warning - 15 days after issuing a three-line statement on February 5th stating that operating profit for 2007 would be substantially below market expectations.
A fuller statement was promised within two weeks and duly released last Wednesday. It ran to 15 lines and warned operating profit will be down 65 per cent when the company reports full year results next month. The slowdown in construction activity was identified as the main culprit, but some blame has also been attached to the decision to dispose of the concrete products business and costs associated with introducing new accounting and operating systems.
While the second statement might have been an attempt to limit the damage caused by the first, the overall impression remains that the slowdown in the construction sector seems to be hitting Readymix harder than most.
The apocalyptic undertones of last week's statement from Readymix contrast with CRH's January trading update. Whereas Readymix talked of a "sharp fall off in house-building and construction activity", CRH's view was that ". . . overall construction activity in Ireland continued at a high level as infrastructure and non-residential construction offset the ongoing decline in residential activity". There is nothing in the CRH update to indicate a fall off in profits at the Irish operation on a par with Readymix.
While CRH's Irish operations are obviously much bigger and more diverse than Readymix's, the overlap in their business is sufficient for this contrasting view of what happened in the Irish construction market last year to look a little curious, to say the least.
Readymix's pessimism also seems a little overdone compared with much of the recent comment from analysts in Dublin. Davy, the house broker, left its price target at 200 cent after the initial profit warning. NCB still considers the stock a buy, despite various caveats about the rate of decline in housebuilding here and committed activity in the North.
It seems fair to say that Dublin's analyst community think the Readymix management is laying the bad news on a bit thick. But optimism is an occupational hazard in stockbroking.
Equally, it's quite possible that CRH's optimism is completely misplaced. CRH can afford to put its best foot forward in this regard, secure in the knowledge that things in Ireland would have to get very bad indeed to make a real impact on the group's European materials, products and distribution businesses at this stage. Readymix, on the other hand, only operates in Ireland and if it gets its guidance to the market wrong, it will be exposed and punished.
Another factor in all this may be that Readymix is controlled and 61 per cent owned by Cemex, the Mexican cement giant. While Cemex, one presumes, is as unhappy as any other shareholder to hear that profits are down this year and the future outlook is far from rosy, it is not going anywhere as a result.
If anything, Cemex is more likely to increase its stake at these levels. According to NCB, there is tangible asset backing for the shares of some 175 cent while the shares languish at around €1.40. If Cemex is considering bidding for the remaining 39 per cent at these levels, it will not thank the Readymix board for creating unrealistic expectations among the minority shareholders.
However, any suggestion that the executive directors are over-egging the pudding to keep down the price is equally dangerous. Readymix puts out its results on March 3rd, followed a day later by CRH. We will have a better idea then of whether or not all this pessimism is justified.
