Bottom Line: Markets look into Bowater's skull

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BOWATER fell victim yesterday to what is becoming a trend this results season, a hatchet job on the share price in response to what appear to be respectable figures.

A 39p fall to 453p seemed a harsh reaction to a 15 per cent jump in earnings per share and a 13 per cent increase in the dividend. But it is an indication of the willingness of a toppy market to see the skull beneath the flesh.

The ostensible reason for the downrating was a fall in printing and packaging margins from 9.4 per cent to 8.1 per cent. That kept the return on sales from the group as a whole more or less flat.

There were three reasons. Moving into plastic milk and juice cartons caught the wave of a trend away from glass and paper cartons, but it put Bowater at loggerheads with Plysu, its rival, and prices collapsed. Cheque printing was also loss-making and cosmetics suffered from destocking.

Another, justifiable, concern is that now the acquisition spree of the past few years has drawn to a close, contributions from new businesses will stop disguising a modest underlying increase in volumes of only 2 or 3 per cent. Bears also point to pressure on margins from rising raw material prices.

But all that adds up to a churlish reaction to a management team that has more than doubled the dividend since 1987 and kept earnings buoyant.

Bowater has outspent depreciation every year in order to bring out new products and secure market position. It has excellent cash flow, which has brought gearing down from 56 per cent to 40 per cent in a year.

Despite that, and on the basis of forecast profits of pounds 233m this year and pounds 253m next time, the shares only trade on a market rating. That is good value.