Bottom Line: Jefferson must sit tight

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The Independent Online
THERE seems no respite from the gloom emerging from Jefferson Smurfit, the Dublin-based corrugated packaging group.

Interim profits have fallen sharply for the second time in succession with the taxable result down from Ir pounds 60m to Ir pounds 51m. Earnings per share slumped by almost a fifth to 7.4p but the interim dividend has been held at 1.23p.

The problems stem from tough economic conditions, which led to a fall in prices. Although the group did well to boost underlying sales in Britain and Ireland, margins were again under pressure, reducing profit before interest from Ir pounds 14.5m to Ir pounds 11.5m.

Similar factors were behind the more than doubled Ir pounds 11.7m loss in North America and a fall in Continental Europe's profits from Ir pounds 16.5m to Ir pounds 9.7m.

With a quick improvement in trading conditions unlikely, there is little the group can do other than continue to pare costs. To that end, Jefferson Smurfit Corporation, its US affiliate, has drawn up a restructuring plan to reduce manning, rationalise production and sell non-strategic assets. A number of offices are expected to be closed. Although the measures should eventually improve profits, their immediate impact will be negative. The cost-cutting will result in a dollars 100m after-tax charge in the US, translating into an estimated Ir pounds 25m after-tax exceptional bill for the group.

The company is also considering floating JSC. The move would help to reduce JSC's dollars 2.4bn debts and provide an exit for Morgan Stanley, its majority shareholder.

However, there is a limit to how much Smurfit can reduce costs. Operating in a highly cyclical sector, its profits recovery is closely dependent on the resumption of economic growth. Its robust balance sheet - with net cash of Ir pounds 24m - puts it in a strong position to ride out the depressed conditions. It could also provide it with an opportunity to diversify into higher-value markets.

With the market looking for taxable profits before exceptionals of Ir pounds 94m, the shares, down 8p at 214p, trade on a multiple in the high teens. They could fall further.

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