Investment Column: Arjo Wiggins

ARJO WIGGINS Appleton makes paper for airline tickets and euro banknotes, but monetary union and the popularity of air travel aren't enough to guarantee its future.

The company's shares crashed from around 250p to 93.5p last year as the Russian economic crisis turned the screws on its markets. The shares have since almost fully recovered - yesterday they tipped up 11p to 243p - after pulp prices moved in Arjo's favour and its newly appointed executive chairman Ken Minton implemented a massive restructuring programme. Can they go further?

Mr Minton's been taking the axe to Arjo's European operations. He says the group has too many sites and there remains scope to generate economies of scale. The restructuring is not cheap; in the first half, it cost pounds 106m, almost entirely counterbalancing profits. There'll be more in the second half as Arjo turns its attention to the distribution division, the least profitable but also the largest in turnover terms. The strategy here is also to cut costs by centralising.

All this will generate some one-off increases in returns. But the longer- term outlook is less certain. Arjo's markets are largely mature and present few growth opportunities. It already has 60 per cent of the market for fax paper in Europe, and 40 per cent of the US's. Mr Minton knows this, and aims to take the group into new niche areas. He reckons Arjo has technology which is currently underexploited.

Establishing niche areas is never easy, and there are already plenty of small, nimble players doing it already. Arjo's new-found economies of scale will be of little help.

Stripping out the expected exceptional items, housebroker ABN Amro expects full-year pre-tax profits of pounds 242m, and earnings of 20p per share, rising to pounds 288m and 23.9p the year after.

That puts Arjo on a forward p/e of 12, a 20 per cent discount the sector. Given the uncertainties surrounding costs and outcome of the ongoing restructuring, the discount is justified. After the shares' strong recovery, investors should now consider taking profits.