P&O's vintage ports offer ferry good value

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The Independent Online

The Peninsular & Oriental Steam Navigation Company - P&O to its friends - has been sailing the oceans since the 1830s and has a corporate history that might be described as "well travelled". Its interests have embraced cargo shipping, cruises and at one point or another even extended into oil exploration and housebuilding.

Lord Sterling of Plaistow, who celebrates 20 years as captain this year, has most recently slimmed it down to focus on European ferries, transoceanic shipping and the operation of container ports - and even in this new guise it has had a torrid time, suffering the ravages of the global economic slowdown. The share price graph is enough to make an investor feel seasick, but things do look to be moving on to an even keel.

A trading update yesterday confirmed the rebound in profits at its P&O Nedlloyd joint venture in cargo shipping. Cost-cutting has helped but the main driver has been the shift of low-cost manufacturing from Latin America to China, accelerated by the global downturn and a series of economic crises. Products that could previously be shipped into the US by road are now coming across the Pacific and the increased demand is not being matched by new ships, so prices have soared.

A similar story has improved the prospects for P&O's ports businesses, especially in Asia where it has been investing heavily. Container volumes through its ports are up 20 per cent on 2002 in the first half of the year.

The only downbeat part of yesterday's update was news the group will put an extra £5m in the first half (probably £10m over the year) into its pension fund, which has a deficit that is yet to be properly quantified. This only takes the shine off P&O's strong recovery, rather than threatens it in any significant way. Analysts currently value the various parts of the business at a small premium to the current share price, but the trading news should just get better.

Ferry good value.

Recycle your paper in DS Smith

DS Smith, the paper, packaging and office supplies company, makes everything from wine boxes to milk cartons and is one of the biggest makers of recycled paper in the country.

All UK manufacturers have had a tough time in the past year. But having sold off less profitable businesses and turned round some of its plants, notably Clay Cross in Derbyshire, things haven't been so bad for DS Smith. Annual profits before exceptionals were up 27 per cent to £79.7m and it has reversed last year's cash outflow.

But it's not all good. Margins are being squeezed in its paper division. The raw material it needs - waste paper - is rising in cost because of demand from overseas, but DS Smith is finding it impossible to pass this on to its customers. The recycled paper division is 50 per cent of sales and 60 per cent of operating profits, so if this situation carries on for some time, growth will be difficult. Meanwhile, demand for pens, paper clips and staples is still poor as cash-strapped companies find easy cost savings by policing the stationery cupboard.

Investors should also be aware of its burgeoning pension problem. Under the FRS 17 accounting rule, the deficit has leapt from £7m to £94m. When the company changes its accounting methods next year, its current £10m credit from the pension fund will become a charge, meaning reported earnings will take a hit. Worse, the company is having to put £10m of extra cash a year into the fund, which could constrain growth of its dividend. The yield on the current share price is a pleasant 5 per cent.

Down 5.5p to 166.5p yesterday, DS Smith shares trade at around 10 times forecast earnings. Immediate prospects do look a little muted, but the company is well run and getting used to difficult times. Hold on to your shares - you are unlikely to be pulped.

Chemring to gain from fad for flares

American commercial aircraft might soon all have to be fitted with missile defences, if Congress gets its way. Chemring is in favour, too, since it is one of the companies that have started to develop new technology in this area. Its decoy flares and hi-tech chaff already help stop military planes being shot down.

Such "counter measures" are big business for Chemring, which finally looks to have got itself back on the level after a tailspin in 2002. When we last looked at the group in October, it was still suffering the disruption caused by a fatal fire at its flares factory in the US. Kilgore, the subsidiary involved, was finally back in profit in the first half of this year, although it is going to take a while yet to see if its insurers will pay the £7m-plus Chemring says they still owe.

The insurance dispute has fuddled the financial figures somewhat, since a credit last year was not repeated this year and pre-tax profits were down slightly to £4.3m as a result. But sales are up 16 per cent and Chemring has outstanding orders from the defence industry totalling £97m. The US airforce is buying products which generate a cloud of chaff around their fighter planes to head off missiles. And some Middle Eastern regimes are stocking up on military pyrotechnics used to simulate the battlefield in training exercises.

Chemring's shares are up a third since we said "buy" in October and, up 5p to 335.5p yesterday, trade on 12 times this year's earnings. Buy.

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