Shares in building materials group Grafton surged by 5 per cent yesterday to €4.08 after the firm said its profits for the first half would beat market forecasts.

In a trading update, Grafton said it was achieving good "like for like" sales growth and generating higher-than-expected profits at recently-acquired UK merchanting chain Jackson's.

The company also disclosed the acquisition of three single-branch merchanting outlets in the UK and the opening of seven "greenfield" branches.

Grafton also commenced production and sales from its sixth dry mortar plant in Essex over the first half.

Finance director Mr Colm Ó Nualláin said the company was prepared to expand further in the UK and was looking at a "healthy pipeline" of modest acquisition opportunities in various parts of the country.

The UK now accounts for almost 70 per cent of Grafton's turnover.

Mr Ó Nualláin acknowledged that the rise of the euro against sterling over recent months would hit the translation of UK profits into euro for reporting purposes.

He said however that business was "more than compensating" for any conversion shortfall, adding that UK profits are not repatriated.

In the Republic, Grafton is preparing to open five new Woodies DIY stores, with two likely to be launched before Christmas in Cavan and Carlow.

The five new stores will bring the Woodies network to 19.

Mr Ó Nualláin said the Irish business had been performing well in the first half, but expressed some "caution" about prospects for 2004.

"We have a genuine feeling that the level of housing activity will slow down," he said, adding that the company had been surprised at the buoyancy it had seen so far in 2003.

Grafton is due to report interim results in September. Analysts are pencilling in a rise of up to 13 per cent in earnings and are bullish about the group's prospects for the remainder of the year.

NCB analyst Mr John Sheehan said the shares had the potential to reach €4.50 this year, based on acquisitions already completed,while Mr John Mattimoe of Merrion Stockbrokers believes Grafton could reach €4.75.

Shares in the company closed 20 cents higher at €4.08 last night.