THE INVESTMENT COLUMN: Bowater's promising package

Bowater has come a long way since 1987 when new management set about transforming a ragbag of unrelated businesses into what is now a well-focused printing and packaging company, operating in growing markets around the world.

During the past seven years it has spent more than £1.5bn on acquisitions, raised about £650m from disposals and given shareholders a total return of more than 20 per cent a year.

Despite that impressive record, the shares have been dull for more than 18 months now as investors worried about the ability of Bowater to cope with the raw material price rises that usually characterise the early stages of economic recovery.

They were right to expect the increases but seem to have misjudged the extent to which management could persuade customers to accept the rises in prices. Despite increases of between 70 and 100 per cent for much of the paper and plastic that goes into Bowater's Dior lipstick cases, Allisons bread wrappers and Vaseline pots, and despite the inevitable time-lag between receiving notice of higher costs and passing them on, profits and margins were nicely ahead last year.

Bowater spends about £1bn a year on raw materials, so failing to pass on the rise could easily have wiped out profits.

Pre-tax profits before exceptionals increased 14 per cent to £231m from a 12 per cent rise in sales from continuing operations. After an 11 per cent jump in earnings to 31.2p, the total dividend was a tenth higher at 13.8p.

The extent of the changes imposed over the past seven years is best measured by Bowater's return on sales, which broke through the 10 per cent barrier last year for the first time. One reason for that has been the company's consistently high commitment to capital expenditure, which, as the chart shows, is outstripping depreciation by an ever-widening amount.

The focus now turns to making the existing assets work harder. The investment needed to wring out those extra efficiencies should be available from strong cash flow. At the year-end borrowings had risen to almost 60 per cent of shareholder funds, but the planned sale of the remaining Australian engineering assets could raise £70m, which would take gearing comfortably lower.

Remaining worries include the weakness of the dollar, with 35 per cent of profits generated in North America. Against that, the main economies are strengthening and Bowater should comfortably make £255m this year and £280m next time.

That puts the shares, which at 432p, up 6p yesterday, have fallen 16 per cent since peaking in August 1993, on a market rating. Scant credit for the achievements so far or for the solid prospects.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

£18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

Ashdown Group: Learning and Development Programme Manager

£35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

Recruitment Genius: Claims Administrator

£16000 - £18000 per annum: Recruitment Genius: A position has arisen within th...

Ashdown Group: Development Manager - Rickmansworth - £55k +15% bonus

£50000 - £63000 per annum + excellent benefits : Ashdown Group: IT Manager / D...

Day In a Page

The saffron censorship that governs India: Why national pride and religious sentiment trump freedom of expression

The saffron censorship that governs India

Zareer Masani reveals why national pride and religious sentiment trump freedom of expression
Prince Charles' 'black spider' letters to be published 'within weeks'

Prince Charles' 'black spider' letters to be published 'within weeks'

Supreme Court rules Dominic Grieve's ministerial veto was invalid
Distressed Zayn Malik fans are cutting themselves - how did fandom get so dark?

How did fandom get so dark?

Grief over Zayn Malik's exit from One Direction seemed amusing until stories of mass 'cutting' emerged. Experts tell Gillian Orr the distress is real, and the girls need support
The galaxy collisions that shed light on unseen parallel Universe

The cosmic collisions that have shed light on unseen parallel Universe

Dark matter study gives scientists insight into mystery of space
The Swedes are adding a gender-neutral pronoun to their dictionary

Swedes introduce gender-neutral pronoun

Why, asks Simon Usborne, must English still struggle awkwardly with the likes of 's/he' and 'they'?
Disney's mega money-making formula: 'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan

Disney's mega money-making formula

'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan
Lobster has gone mainstream with supermarket bargains for £10 or less - but is it any good?

Lobster has gone mainstream

Anthea Gerrie, raised on meaty specimens from the waters around Maine, reveals how to cook up an affordable feast
Easter 2015: 14 best decorations

14 best Easter decorations

Get into the Easter spirit with our pick of accessories, ornaments and tableware
Paul Scholes column: Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season

Paul Scholes column

Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season
Inside the Kansas greenhouses where Monsanto is 'playing God' with the future of the planet

The future of GM

The greenhouses where Monsanto 'plays God' with the future of the planet
Britain's mild winters could be numbered: why global warming is leaving UK chillier

Britain's mild winters could be numbered

Gulf Stream is slowing down faster than ever, scientists say
Government gives £250,000 to Independent appeal

Government gives £250,000 to Independent appeal

Donation brings total raised by Homeless Veterans campaign to at least £1.25m
Oh dear, the most borrowed book at Bank of England library doesn't inspire confidence

The most borrowed book at Bank of England library? Oh dear

The book's fifth edition is used for Edexcel exams
Cowslips vs honeysuckle: The hunt for the UK’s favourite wildflower

Cowslips vs honeysuckle

It's the hunt for UK’s favourite wildflower
Child abuse scandal: Did a botched blackmail attempt by South African intelligence help Cyril Smith escape justice?

Did a botched blackmail attempt help Cyril Smith escape justice?

A fresh twist reveals the Liberal MP was targeted by the notorious South African intelligence agency Boss