The Investment Column: Strong pound depresses Smith

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The Independent Online
Things really are looking dismal when a company starts talking about being open to takeover talks. Peter Williams, chief executive of David S Smith, the paper and packaging group, needs to cheer himself up somehow. The curse of sterling continues to hang over the company. The strong pound has hit the value of Smith's exports while enticing European paper manufacturers looking for a home for their excess capacity into the UK market, where Smith makes most of its money.

As a result Smith's profits for the half year to November slumped 50 per cent to pounds 29.3m with sales down 10 per cent to pounds 554.8m, half of which was due to sterling.

The sector itself isn't in bad shape. Growth in mail order and home shopping, which uses small boxes, is lifting demand for corrugated paper. And manufacturers are starting to hold back on increasing capacity, though that remains a problem.

However, Mr Williams is right that there needs to be further consolidation in the sector. Though he says the company is not up for sale, he would not be opposed to a takeover. As for bidders? In a global sector take your pick, though buying Smith would make more sense for a non-UK player which hasn't been hammered by sterling. The US's International Paper and Sweden's SCA are two front runners.

UBS is forecasting pounds 55m full-year profits. The shares, down 8.5p to 196.5p, are on a forward p/e ratio of 15 times. Not a buy.