The Investment Column: Plysu feels its margins squeezed

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At first glance, the average investor might be forgiven for thinking the packaging company Plysu should be doing rather well. It commands over 60 per cent of the UK market for plastic milk bottles, an area which is growing at around 20 per cent a year as British households turn their back on the doorstep pinta in favour of supermarket supplies.

But Plysu is in an uncomfortable position as a small company squeezed between the giant suppliers of its plastic raw materials and the huge supermarket chains which buy its containers.

A 13 per cent growth in volumes, boosted by milk containers plus some small acquisitions, helped lift last year's profits to March from pounds 6.47m to pounds 8.02m, before an exceptional pounds 1.1m rationalisation charge. Profits remain well short of the pounds 10.8m they hit in 1992/93, but last year's small uptick should give some comfort to shareholders who have seen the company caught in a vice between store chains which have until recently used milk as a loss leader and soaring prices for high density polyethylene.

Recent increases in milk prices and the introduction of a new plastic pint container for Tesco is providing some grounds for hope that the pressure from customers is easing. Meanwhile, the collapse in HDPE prices from the second quarter helped Plysu to widen its margins from 4.9 per cent to 7.5 per cent between the two halves of last year.

Even so, the respite may prove temporary. Continued attention to costs looks like remaining a feature of UK retailing, while raw materials prices have been on the rise again since the turn of the year. Plysu's attempts to address this issue are unlikely to inspire.

The company has been pioneering an in-house bottle making plant for Dairy Crest since the end of 1995 and is confident that it will repay the pounds 3m cost within the life of the contract of over four years. But this and other similar initiatives will merely protect otherwise threatened margins.

Elsewhere, Plysu's market shares of between 10 and 17 per cent in industrial chemicals, agrochemicals and automotive packaging products are not going to give it much clout against multi-nationals like Unilever and the big oil groups which are increasingly demanding pan-European sourcing. Apart from one or two areas, like a multi-layered container for toxic chemicals, the company is mainly involved in commodity-type products, with few barriers to entry. The best option for shareholders would be a merger between Plysu and one or more of its smaller brethren to give it more critical mass.

Assuming volumes maintain last year's growth, profits could hit pounds 9.4m in 1995/96, putting the shares at 189p, down 1p, on a forward multiple of 14. That looks high enough.