View from City Road: Bowater one to back

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The Independent Online
COMPANIES that lean on shareholders too often run the risk of losing the market's confidence. Bowater's pounds 295m two-tier rights issue to fund the acquisition of Specialty Coatings International of the US is the second in a year and could undermine its credibility.

But, unlike some other companies, Bowater's move is aimed at building on past success rather than repairing previous management mistakes. In SCI, it has been offered an acquisition opportunity that is not only highly complementary to its existing operations, but may not reappear for years. Not surprisingly, the one-for-six rights was greeted with an 8p jump in Bowater's shares to 493p, taking their overall outperformance against the market to nearly a fifth since Bowater launched a pounds 334m rights issue to fund the purchase of DRG Packaging and Cope Allman last March.

The benefits of those two deals were all too clear from Bowater's full-year results, which accompanied the rights issue. Taxable profits have jumped by half to pounds 147m while earnings per share rose by 12 per cent to 25.1p. The dividend goes up 11 per cent to 11.5p.

Against this background, shareholders have little cause for worrying that their money will be badly spent. In one swoop, the company has more than doubled its exposure to the higher-growth industrial coatings market, accounting for a quarter of the total sales.

With the business being acquired at a lower exit multiple than Bowater's own rating, it should also enhance the enlarged group's earnings from this year. Moreover, SCI offers considerable scope for Bowater's well-honed skills in improving margins. It achieved profit margins of below 9 per cent last year against 12 per cent at Bowater. As a result, the group should be able to achieve taxable profits of about pounds 200m this year, rising to about pounds 240m with the full impact of integration coming through during the following year.

That puts the shares on a prospective multiple of 17.5 times this year's earnings and less than 15 times next year's. They are a long-term buy and shareholders should support the cash call, the only large one in the current batch from a manufacturer.