Bottom Line: Business looks even better on paper

DAVID S SMITH has shrewdly negotiated the recession under the able guidance of Peter Williams for the past three years. It is now well placed to reap the rewards of what some are now forecasting as a 'golden age' for the paper industry over the next several years.

The stock market has been warming rapidly to the Smith story as paper prices have begun to firm noticeably in its main markets and its share price has outperformed handsomely.

Smiths' methods have been at times surprising, involving two chunky acquisitions funded by sizeable issues of shares, but in retrospect look inspired.

The purchase of Kaysersberg Packaging for pounds 155m in March 1992 opened up the recovering European paper and packaging market to Smith while pulling through output from the group's notoriously costly Kemsley mill development.

Maintained operating profits of pounds 23m to pounds 24m at Kaysersberg, despite renewed pressures on selling prices until the final months of the financial year, illustrate how good a purchase it was.

Last summer's near pounds 100m acquisition of Spicers office products has also proved its worth.

Spicers has chipped in substantial surplus cash to help finance Smith's capital spending, produced much smaller losses than expected in France and also enhanced earnings.

Kayserberg and Spicers have helped Smiths through the torrid last leg of the paper and packaging recession where prices were still under pressure despite an upturn in final demand from customers.

The pounds 150m sunk into the Kemsley mill - pounds 90m on plant and the rest in exceptional charges, operating losses, and interest costs - looks a brilliant move now.

Although rising waste prices will restrain margin improvement a little on forecasts of pounds 70m this year, and pounds 95m next, the shares are on no more than a market p/e with solid dividend growth in prospect.

Some see peak profits of pounds 120m - enough to ensure interest in the shares for quite a while.

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