Waste paper a drag on BPB

The Investment Column

The cynics will say it was more than fortuitous that BPB, Europe's biggest plasterboard group, should choose last year to move to average from year-end exchange rates. The pounds 10.3m boost to profits provided by the accounting change neutralised a pounds 10m downturn at the group's recycled paper operation, which chalked up a pounds 3m deficit in the year to March. As a result, group profits before exceptional gains of pounds 14.3m rose 9.4 per cent to pounds 175m last year, a growth rate that would have been more like 3 per cent without the change.

But that is probably unfair to BPB, which has turned in a very respectable performance against a dire European building materials market over the past two years or so. The paper problems, caused by a slump in prices, ferocious competition made worse by the pound's strength and a plant breakdown, are set to continue for six months at least.

The business is back to break-even, helped by a recovery in prices, and BPB is moving to cut costs and capacity, with two plants being sold or closed and another under review. But even so, the drag caused by waste paper means analysts are not expecting the paperboard division as a whole to rise above last year's pounds 13.4m profits, down a quarter on the previous year.

That said, the main plasterboard to insulation products building materials division put in another strong underlying performance. Operating profit was up 7.8 per cent to pounds 153m or 15 per cent when currency effects are stripped out. Plasterboard sales volumes up 8 per cent compare well with other building materials groups and, although a price rise in November has not stuck, divisional margins fattened by 1 point to 13.1 per cent.

More price rises are in store for September and the first pounds 5m of the expected pounds 10m annual cost savings from the pounds 53m state-of-the-art plasterboard plant in Berlin should kick in this year. So the fundamentals remain intact at BPB. Plasterboard consumption in Europe has a long way to catch up with US levels and profits of pounds 185m remain in sight for the current year, putting the shares, down 2p at 333p, on a forward p/e ratio of 14. Fair value.