View from City Road: Bowater's whiff of excitement

DAVID LYON, who collects colourful ties, chose one of his quieter versions when he presented Bowater's results yesterday. As chief executive, he could afford to leave the packaging and printing company's figures to do the shouting.

Taxable profits surged ahead nearly 19 per cent to pounds 62.4m in the six months to 30 June, on a 23 per cent advance in sales to pounds 706m. Fully diluted earnings rose 7 per cent to 22.3p a share. And for shareholders who backed a pounds 334m rights issue last March, there is a 9 per cent improvement in the dividend to 9.7p.

Against a background of deepening gloom, Bowater's results bring a much needed whiff of excitement. Moreover, the picture behind the headline figures looks reassuring.

Although the results have benefited from the pounds 444m acquisitions of DRG and Cope Allman - partly financed by the cash call - the underlying business was also up on the previous year.

Both newcomers have been integrated into the group in just three months and, as promised by Bowater, have enhanced its earnings.

The best guide to the group's management strengths is provided by the recovery in Bowater's operating margins. Last year they slipped due to the costs of reorganisation. But having brought overheads down, in line with prevailing trading conditions, they have jumped from 7.8 to 8.7 per cent in the first half.

The company has resisted pressure to cut prices by improving its production technology and quality of service, enabling it to clinch long-term partnership arrangements with blue chip customers, who are every bit as interested in reliability as price.

With DRG's margins still below the rest of the group, there is further scope for improvement there.

Meanwhile, the introduction of more flexible working practices across Bowater's workforce over the next year should generate further cost savings.

The company is likely to achieve taxable profits of pounds 150m this year, against pounds 113m in 1991.

That puts the shares - up 14p to 739p - on 15 times earnings, a small premium to the rest of the market.

Given Bowater's resilience in a recession and upside potential, the shares are good value.