Jarvis Porter faces the squeeze:The Investment Column

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Since Richard Brewster took the reins as chief executive of the labels to beer mats group Jarvis Porter in 1991 the shares have outperformed the rest of the market by more than 100 per cent. But that growth has been stalled since the start of last year, not helped by the flood of shares issued in connection with the acquisition of the Scottish computer labels group Donprint and three Dutch label companies for a total of pounds 44m in 1994.

Underlying growth is continuing, as yesterday's results demonstrate. Pre-tax profits rose a third to a record pounds 14.1m in the year to February, although the drag caused by those extra shares was clear in the much lower 11 per cent rise in earnings per share to 20p. But the market had other worries in marking the shares down 16.5p to 272.5p yesterday.

Firstly, Jarvis's original business making labels for the drinks, pharmaceuticals and toiletries markets is facing a squeeze from its multinational clients, who are centralising their sourcing on a Europe-wide basis. Although contracts are extended from, say, one to three years and volumes increase, the quid pro quo is lower prices. This pressure is clear from the fact that while the UK non-computer labels business saw volumes rise by a healthy 6 per cent last year, turnover advanced only 4 per cent, after adjusting for the effects of acquisitions. Profits grew from pounds 7.54m to pounds 11m, but that was with the benefit of the first full year of the 1994 purchases.

Meanwhile, Europe has not proved a happy experience. Margins outside the UK shrank by about 4 percentage points as competition among suppliers intensified on the back of a sluggish market. European profits were only kept moving by a maiden pounds 146,000 contribution from Baulip Etiquettes, a French toiletries labels maker. But having made virtually nothing in the second half, that has proven an unfortunately timed acquisition.

That cannot be said about Donprint, which earns around double the gross margins of the traditional operations and has seen sales thunder ahead at a rate in excess of 25 per cent in the past year. The addition of its own coating operation has added around five points to its margins and the start of its first US manufacturing operation in July should open a new seam of business.

Donprint's success has encouraged Jarvis to bring management across from the Scottish company to spearhead a one-year drive in the personal care and pharmaceuticals businesses.

Given its leading position in most of its markets, Jarvis should succeed, but it may have to travel a rocky road in the short term. Margin pressures look set to remain a permanent feature of dealing with multinational groups, while there are already rumours of competitors to Donprint, attracted by the fat margins it earns. On former house broker James Capel's downgraded forecast of pounds 14.8m for the current year, the shares are on a forward p/e of 13. High enough.

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