Investment: Low & Bonar tipped for takeover

LOW & BONAR was tipped as a potential takeover target yesterday after shares in the packaging group fell 13 per cent due to a fall in underlying profits for the full year and a cautious statement on current trading.

Analysts said American predators, which are already circling rival Field Group, might be attracted by Low & Bonar's lowly valuation.

The shares, which closed 15p lower at 165p yesterday, currently trade on a forward multiple of just 6 and yield over 10 per cent. Analysts questioned whether the dividend might be cut this year although management pledged to maintain the pay-out which is currently 1.2-times covered before exceptional charges.

"We have no intention of cutting the dividend. We just felt it was prudent to maintain the second half pay-out," said Jim Heilig, chief executive of Low & Bonar.

Low & Bonar has been hit by a series of problems in its major markets following the pounds 67.5m acquisition of Waddington cartons last autumn. Its packaging operations have been affected by both an influx of lower priced imports from mainland Europe while the economic crisis in the Far East has led to further over-capacity in Europe while cutting demand for its specialist materials products.

Underlying profits were lower than expected at pounds 46.2m. However, the group plunged to a pre-tax loss of pounds 3.3m after more than pounds 50m of exceptional and re-organisational charges.

This includes pounds 40m to cover the cost of closure of a plant in Manchester, which serves Kellogg's, and pounds 9.5m of integration costs relating to the Waddington deal which will yield annual savings of pounds 6m.

Under Mr Heilig, Low & Bonar has started to achieve organic growth and is also shifting the balance of its sales towards higher margin business and away from low price packaging.

But institutions have become frustrated at the slow pace of change in a company whose shares have under-performed the market by 52 per cent in the past year.

Analysts point out that the high yield makes the stock an interesting income stock as interest rates fall. On top of this there is the prospect of a break-up bid either from a packaging player keen on using the carton business to boost market share, or a financial buyer.

Added to this is the prospect of new management being brought in if the current team do not deliver.

This makes the stock a possible speculative punt, though if trading conditions continue to weaken there could still be further downside.

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