St Ives weathers the paper storm

The Investment Column
St Ives continues to shine like a beacon above the rest of the printing industry. Its unflinching commitment to investment throughout the recession has seen it pump pounds 125m into the business over the past five years, all financed from internal cash flow. That is in stark contrast to others in the industry who have been forced to raise cash or undertake a seemingly continuous process of restructuring.

The fruits of St Ives' investment policy came through in half-year results showing profits raised a healthy 25 per cent to pounds 19.6m in the six months to 26 January.

The figures included a maiden contribution of pounds 1.31m from Johler Druck, the German printer of newspaper inserts and other direct response advertising material acquired in a pounds 19m deal last September. No skeletons have been uncovered in that particular cupboard, which represents St Ives' first foray into the continental market for these products.

But despite results which beat many expectations, the market reacted by marking down the shares by 5p to 469p.

St Ives is the UK's leading book printer, with around a fifth of the market, and there had been worries about the impact of the collapse of the net book agreement last year. Those now seem unfounded, as the group appears to have weathered the squall, with sales in the half year ahead in both hardback and paperback books.

More serious were delays and start-up problems with new printing presses at Caerphilly. The difficulties, combined with some caution amongst publishers after paper prices rose, hit profits in magazine printing. Nonetheless, the group has maintained volumes, winning several new titles such as Loaded, Marie Claire and Goal.

The rest of the business has continued to grow. The increase in bids and deals in the City fuelled first-half growth in security printing, where St Ives is a leading player, and the booming stock market bodes well for the future. But the main boost to the group's profits came from direct response and the new multimedia cassette sleeves to CD-Rom printing operation. The market for the former is expanding at around 5 per cent a year.

Net margins at the group appeared to slip a touch to 11.6 per cent in the first half, but in reality this reflects the increase in the direct marketing business where paper costs are borne by the printer rather than the customer, as in traditional printing. In reality, underlying margins are now close to St Ives' peak level of 15 per cent.

Given its strong market position in most areas of the home market, St Ives is increasingly going to have to look abroad for growth. With capital expenditure expected to fall from around pounds 48m to pounds 30m in 1996, net cash could be back up to pounds 29m by the year end, giving the group plenty of firepower. Henderson Crosthwaite's full-year profit forecast of pounds 43.5m suggests a forward multiple of 16 for the shares. A fair rating for such quality.