UK market may be bridge too far for McInerney


A little throw-away sentence in McInerney Holdings' press release would have been sufficient to send shivers down the spines of even the most seasoned investors. That innocent enough looking sentence merely said it is "currently considering re-entering the UK construction market".

Is that not that the market which has oodles of question marks over it? Has not Abbey, the house building group, already warned that the margins from its British operations would be weaker in the second half of 1998? And, more crucially, was it not the British market that brought McInerney to its knees in the early nineties, from which it had to exit?

McInerney, which has made a remarkable recovery, is quick to allay fears that success may have gone to its head. Indeed, it insists that it might not make the proposed acquisition of a British housing and industrial group. And if it does, it will be small - around €0.63 million (£0.5 million). The managing director, Mr Barry O'Connor, told The Irish Times it provides it with a "strategic presence" and will be its "eyes and ears with a view to the long-term".

That is reassuring. Despite the rapid return to profits, and the soaring of its share price - from a placing price of 35p two year years ago to a high of 185p last year - it is still capitalised at just €39 million (£30.6 million). This will rise to only €49 million following the placing and open offer announced last week. That smallness would make it particularly vulnerable in a market with declining profit margins. However, the plan outlined to expand on the domestic market is, in percentage terms, one of the largest ever contemplated by an Irish publicly quoted group. Envisaging a doubling of its business in just two years looks very ambitious.

Is the company over-stretching itself, and are the targets realistic? McInerney is pinning its plans on a continued buoyant housing market. NCB, in a review of the market, points to the fundamental strengths. Demand is estimated, by NCB, in the range of 36,000 to 56,000 units per annum, between now and 2006. However, demand, because of the shortage of serviced land, is likely to continue well ahead of supply. McInerney completed 582 houses in 1998, so it just needs an extra 400 to meet its target of 1,000 by 2000. It could do this by doubling the numbers sold in Cork (129) and in Dublin (124), sell 100 in Galway, a market in which it is re-entering, and sell about 50 elsewhere. McInerney estimates its share of the residential market at about 1.6 per cent. Meeting these targets would bring its share up to 2.3 per cent, a very attainable target.

With the injection of £7.3 million net from the placing and open offer to shareholders, and the £10 million increase in bank facilities, it should have sufficient finance for the expansion. Moreover, the group expects to keep gearing below 80 per cent.

However, what will all this mean to the bottom line? It looks very good - earnings could grow by an average of 40 per cent per annum over the next two years. Prior to the proposed expansion, NCB, the group's brokers, was forecasting an eps of 25.7c for 1999 compared with 21.7c (excluding an exceptional profit) for 1998, representing an 18 per cent increase. This should now accelerate but the benefits from the new expansion will only start to show through in the second half of this year.

McInerney has the potential to push eps beyond 38c (30p) by 2000. This would put the shares at 149c (117p) on a prospective p/e (based on 2000) of only 3.9. That is a bit down the road, but then McInerney is a far more immediately attractive prospect than Abbey, which has a prospective p/e of 5 to 6, depending on which brokers' projections are taken. Based on these calculations, it is clear that the shareholders should take up their full entitlement under the open offer. This entitles them to one new share at 149c for every four shares held.

McInerney, taking advantage of the buoyancy in the housing market, is on a bit of a roller coaster. That should continue, at least over the next few years, provided it does not, at this stage, get sucked into the British market.