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The Investment Column: Jefferson Smurfit

JEFFERSON SMURFIT, the world's largest paper-based packaging manufacturer, pleased the City yesterday despite posting a 42 per cent slump in pre- tax profits to 70m euros (pounds 46.2m). The results saw the shares continue a recovery which has seen them rise 75 per cent this year, following their collapse in October as Smurfit was hit by the fallout from the economic turmoil in emerging markets. The question is whether that recovery will continue.

Smurfit's fortunes are dependent on containerboard prices, the main component of brown cardboard boxes. These were weak in the first quarter, although prices of linerboard, Smurfit's main product that forms the outer layer of boxes, have risen this year.

Throughout the 1990s an imbalance of supply and demand dogged the packaging industry and forced down the ratings of shares in sector. But Smurfit investors have been betting that packaging producers will be able to implement more price hikes following moves by the main players in the industry to cull their capacity and streamline operations.

Indications are that a punt on continued recovery in Smurfit's shares is justified. The supply of linerboard has been curtailed, with production cut back by 2m tons in the US this year. Half of that reduction was made by Smurfit-Stone Container Corp, Smurfit's US associate in which it has a 34 per cent stake. Demand is also picking up in the US and Asia. Meanwhile, the merger between Jefferson Smurfit's US division and Stone Container Company that formed SSCC last year has produced annual cost savings of $220m.

The stockbroker Goodbody expects full-year pre-tax profits of 105.9m euros, with an earnings per share of 6.3c rising to 413.7m euros and 26.2c in 2001. On five times forecast earnings in 2001, the shares, at 189p, are good value.