David S Smith's figures for the six months to 31 October, showing a 29 per cent increase in pre-tax profits before exceptional items to pounds 15.2m, disguise the full impact of torrid conditions in European paper and packaging. Thanks to a heroic contribution from its French newcomer, Kaysersberg, bought in March for pounds 153.5m mainly with historically highly valued shares, underlying earnings were down only 5 per cent.
In the first half Kaysersberg chipped in much-improved operating profits of pounds 11.9m, which more than offset a one-third downturn in the trading contribution to pounds 7.7m from David S Smith's UK paper and packaging companies.
Profits in UK packaging were steady despite tough commercial conditions and disruption at Abbey Corrugated. St Regis Paper slumped to barely break-even after a pounds 6m hit from its pounds 75m Kemsley mill development, due for completion in the autumn.
David S Smith, where Peter Williams is chief executive, is also incensed about a continuing pounds 10m to pounds 15m revenue shortfall because of 'unfair' competition by subsidised German paper recyclers, now a subject of formal complaint to the EC. Germany is a near-term risk: it now takes pounds 25m of sales post-Kaysersberg, but that level could fall back quite sharply.
Those problems apart, the company is substantially geared for a recovery. Operationally, a two-thirds increase in capacity at Kemsley, a fair amount going to Kaysersberg, could come on stream over the next few years. Financial gearing, in the shape of borrowings, may reach 60 per cent of shareholders' funds in 1993/4 on the back of peak spending at Kemsley.
Pre-tax profits could rise from pounds 30m to pounds 45m next year for a prospective multiple of 10.7 at 314p on a 15 per cent tax charge. If profits manage to keep broadly in step with a rising tax charge, which recovery should allow, then the shares look attractive despite recent strength.
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