Arjo Wiggins suffers pulp friction

Investment Column
Profits at nearly all large paper companies have crumpled this year as customers destocked in anticipation of lower prices, which duly arrived, shredding margins in the process. Invariably the main culprit cited is pulp, the basic raw material for paper-makers, where prices have halved to $500 a tonne in just six months.

As one the world's biggest net buyers of pulp, such a development ought to have benefited Arjo Wiggins Appleton, but life is never that simple at the troubled Anglo-French paper group. When pulp prices are rising - as they did throughout last year - Arjo finds it hard to pass on the higher costs fast enough. When they collapse - as they did in the first half of 1996 - demand for its products follows.

Cob Stenham, Arjo's chairman, describes the last 12 months as the worst since the group floated six years ago. European manufacturing, which takes in carbonless, thermal, coated, fine and speciality papers, lost pounds 6.2m in the first half. But yesterday's 76 per cent setback in group profits, flagged in a string of recent profit warnings, cannot be solely blamed on market conditions.

Arjo is horribly exposed to the mature carbonless paper market, which has been clobbered by the rise of the laser printer and the growth in electronic systems, while thermal fax paper, another leading Arjo grade, is threatened by the shift to plain-paper copying. Small wonder that these two activities in Europe, which reported a "substantial" if unquantified loss in the period, are bearing the brunt of a pounds 121m strategic review involving several mill closures and a 7 per cent headcount reduction.

It is too early to tell whether the cost-cutting, instituted by the previous chief executive Alain Soulas, is too little too late. In the meantime, Arjo can thank its lucky stars that Appleton, its US operation, continues to outperform the rest of the group, even if the half-time profit contribution from North America fell to pounds 39.5 from pounds 61.6m. Arjo's new chief executive, Phillippe Beylier, is keen to integrate Appleton further into the group, a long-overdue move given the increasingly global nature of paper markets.

Arjo has also expanded into less cyclical paper merchanting, but it suffered a big strategic blow last year when it was outbid for coated paper producer SD Warren. Profits of about pounds 130m this year would put the shares, down 5p at 181.5p, yesterday, on a forward p/e ratio of almost 20.

Although Arjo says the extended period of destocking is over and order books are better, it admits the economic outlook, especially in Europe, remains unexciting. The same can be said for the shares, unless the French food group Saint Louis puts its 40 per cent stake into play.