RMC: uncertain prospects remain

Deutsche Bank analysts have downgraded RMC to a sell, price target 600p. While the appointment of new management and a turnaround in the troubled UK business have sparked a re-rating of RMC (he stock was up 84 per cent in 2003) the analysts key worry is that the German business will continue to struggle while
its peers are recovering:

RMC is long ready-mix, short cement in Germany. It needs ready-mix prices to go up. Higher cement prices have less benefit to RMC. Higher cement profits are largely offset by lower ready mix profits as the higher cost of cement used in the production of ready mix feeds through. Cement prices are rising 57 per cent, or Euro 20 per tonne. In contrast prices in the fragmented ready-mix sector prices are still under pressure.

RMC played key roles in the German cartel investigation and the 2002 cement price war. These events will cost market leader HeidelbergCement alone Euro 500m in lost profits. It is hard to see cement players helping RMC much to increase ready mix prices. Moreover, RMC was heavily dependent on selling cement in East Germany to HeidelbergCement. This trade is unlikely to ever be renewed, except perhaps on very unfavourable terms for RMC.

Deutsche Bank analysts don’t see RMC as a bid target if the turnaround falters. Given the premium rating and history of shareholder value-destruction for large deals in the sector, the analysts cannot imagine a bidder at these levels. Dividend cover is below two until 2006 on our forecasts. A cut is a real possibility if Germany losses continue. The two risks to Deutsche Bank analysts Sell recommendation are a substantial turnaround in Germany or M&A activity.