Bottom Line: The good news from Smith speaks volumes

THE MARKET is on the look-out for cyclical businesses. So David S Smith's news that volumes were picking up here and on the Continent was met with a jubilant response and the shares were marked up 18p to 456p.

The UK corrugated paper market picked up by 3 per cent in the first 11 months of 1993 and there has been some acceleration in the growth rate in recent months.

The UK market for recycled corrugated case material is estimated to be growing by 6 per cent and France and Germany are showing signs of life.

A 31 per cent sales gain was offset by a fall in operating margin from 7.6 to 5.8 per cent as customers cut back on the cost of keeping stock and demanded many small deliveries. Operating profits were flat, pre-tax profits fell from pounds 15.2m to pounds 13.2m and earnings per share shrank from 12p to 9.3p.

However, the company generated net cash of pounds 30.8m and reduced gearing to 41.3 per cent (45.5 per cent). In addition, Spicers Group, bought in July, has been integrated surprisingly quickly and contributed pounds 3.9m.

The case for buying the share is that Smith has high operational gearing and, with a rebound in the paper cycle earnings, this could be significantly higher by the April 1995 year-end.

At least one broker is forecasting earnings of 27.5p a share for that year, which would put the stock on a prospective price/earnings ratio of 16.6 times. This seems a full enough rating.