THE INVESTMENT COLUMN

No indigestion for paper tiger Smurfit roars

Jefferson Smurfit, which accounts for 15 per cent of the value of the Dublin market, is on a roll. A series of acquisitions has created arguably the world's biggest packaging group just as selling prices have recovered to pre-recession levels.

Underlying profits soared in the six months to June, with the figure before exceptionals jumping from IRpounds 44.6m to IRpounds 201m, which translated into underlying earnings per share of 12.8p, up from a meagre 3.5p last time.

The figures were the first to reflect a full period's contribution from the paper and packaging operations of Compagnie Saint-Gobain, Cellulose du Pin, acquired for IRpounds 684m last November. The business has transformed Continental European operations, raising turnover there from Irpounds 203m to Irpounds 925m. But a maiden contribution of over Irpounds 60m to European profits, which rose from Irpounds 7.7m to Irpounds 95m, suggests integration is proceeding well. The acquisition contributed around 3.4p to these figures.

The group's European presence has also been reinforced recently by the Irpounds 56.4m acquisition of Papeteries du Limousin in France and Munksjo, a Swedish group picked up for Irpounds 68m in June.

These purchases have come as prices have taken off, with pulp alone up from around $325 a tonne in mid-1993 to $925 now. Strong demand means the group has been able to raise prices ahead of costs, which, with bigger volumes and lower costs, has pushed group margins to 6.5 per cent from around 3 per cent last time and pushed the US operations back into the black.

Profits of somewhat over Irpounds 405m this year would put the shares on a lowly multiple of less than eight, which reflects the market's belief that the paper cycle will turn down towards the end of next year.

Smurfit believes that is unduly pessimistic, suggesting that although prices for corrugated boxes have now probably peaked, there is still further to go in US newsprint and coated paper.

From a 13 per cent return on capital currently, the company believes something nearer 15 per cent is possible across the whole cycle. Such a forecast makes some heroic assumptions about current demand from the Far East holding up. Even so, the market is being unduly cautious, while a share buy-back - involving just short of 2.5 per cent of the share capital - should ease any indigestion in Dublin following last year's rights issue.

Shares reel after Marley bombshell

Yesterday's 8 per cent slide in Marley's share price to 115.5p was a pretty charitable reaction to the bombshell Marley dropped on its shareholders.

The acquisition of US plastic chair maker Syroco in April cost almost pounds 90m, involved a one-for-six rights issue at 112p to finance it, and was expected to be earnings-enhancing next year. It hasn't quite worked out that way.

Less than half a year on, investors are told that Syroco had a terrible second quarter in which it made only $3.2m compared to $9.4m last year. Worse, a second-half loss will lead to break-even at best for the rest of 1995.

That took the shine off interim figures that on the face of it looked pretty good - pre-tax profits up from pounds 18.7m to pounds 24.1m and earnings per share up 21 per cent to 5.1p. Only a flat interim dividend of 2.1p suggested that all was not well.

Hindsight is a wonderful thing, but it is now clear that Syroco is extremely vulnerable to pricing pressures - rising plastic prices have squeezed it at one end while flat retail demand has made life difficult at the other.

It is worryingly dependent on two or three large buyers, including WalMart, who can be expected to demand that any reductions in raw material prices are passed on in full.

The rest of the business is also under pressure and it now appears that Marley's recovery last year was a short-lived affair.

Profits from roof tiles and blocks jumped from pounds 5.7m to pounds 9.6m thanks to higher selling prices offsetting falling demand, but volumes have continued to track the housing market down this year and pricing can only be expected to follow.

After last year's pounds 58m profit, forecasts this year of pounds 48m put the shares on a prospective multiple of 11, falling to 10 on next year's estimates of about pounds 56m. That may not sound steep, but the market takes nasty surprises badly and a 10 per cent discount to the sector may not satisfy it.

A 5.5 per cent yield provides some support but the shares, despite their slide from last year's high of 206p, are still expensive.

Senior engineers profit increase

It has been a roller coaster ride for shareholders in Senior Engineering over the past 18 months, but the Hertfordshire aerospace and automotive engineer looks to be in better shape than it has for some time. Stung by last year's profits warning, the market has treated the company with caution and on a marked discount to the rest of the sector. With a 4.6 per cent yield, the shares look well supported.

Underlying profits before tax, excluding a pounds 7m hit to cover a thermal engineering contract that turned sour, increased from pounds 12.1m to pounds 14.3m in the half-year to June. Earnings per share increased 12 per cent despite a higher number of shares in issue and the interim payout was increased 5 per cent to 1.37p.

Driving the recovery has been good growth in profits and margins from the engineered products division, which is finally benefiting from large amounts of investment. Products such as flexible exhaust connectors for the car industry have been boosted by environmental legislation while the aerospace operations are recovering from recession.

As important is the decision that Senior can do without the lumpy and risky earnings provided by the former core thermal engineering business. With sales of almost pounds 120m and a recovering order book a buyer should be easy enough to find, and reinvesting the proceeds in growing engineering niches will more than make up for the loss of the division's contra-cyclical attractions.

House broker Albert E Sharp nudged up its profit forecasts for this year and next to pounds 30m and pounds 34m, giving earnings per share of 7p and 7.9p respectively. After yesterday's 2p rise to 99p, the shares stand on a prospective p/e of 12.5. Fairly priced.

COMPANY RESULTS

Turnover pounds Pre-Tax pounds EPS Dividend

Dawsongroup (I) 34.4m(28.1m) 5.4m(5.0m) 11.7p(10.8p) 2p (1.8p)

Friendly Hotels (I) 17.6m(16m) 1.1m(963,000) 2.4p(1.7p) 2.2p(2.2p)

Harrington Kilbride (I) 5.7m(7.8m) -1.8m(-1.4m) -17.9p(-13.7p) - (-)

Jefferson Smurfit (I) Irpounds 1.5bn(Irpounds 773m) Ir200.6m(Ir251.5m) 12.8p(3.5p) 1.4p (0.7p)

Kerry Group (I) Irpounds 580m(Irpounds 419m) Irpounds 16.5m(Irpounds 14.9m) 8.8p(7.9p) 1.1p(1p)

Marley (I) 352.6m(315.9m) 24.1m(25.3m) 5.1p(6.5p) 2.1p(2.1p)

Quarto Group (I) 26.6m(22.6m) 1.5m(1.7m) 3.8p(4.8p) 2p (2p)

Senior Engineering (I) 219.1m(196.5m) 7.3m(12.05m) 1.69p(3.24p) 1.37p(1.3p)

Sunleigh (I) 20.7m(7.9m) 458,000(270,000) 0.06p(0.12p) -(-)

W H Smith (F) 2.7bn(2.4bn) 100.9m(83.4m) 23.9p(19.9p) 10.4p(10.4p)

(Q) - Quarterly (F) - Final (I) - Interim

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