Little comfort for share price

The risk of weaker world economic growth, falling demand for paper products from Asian economies and concerns about its US merger deal with Stone will continue to dog the Smurfit share price.

Half-year results yesterday were in line with market expectations but the focus is now on the outlook for the rest of the year.

Weakening product prices in difficult markets will depress profits. With product prices in the US heading downwards, analysts are expected to scale back current 1988 profits forecasts of between £205 million and £210 million. But profit forecasts for 1999 - the current range is £338 million to £365 million - based on a linerboard price of $400 to $420 per ton will be scaled back more savagely. The linerboard price is currently at $360 per ton and on the way down from a high this year of $390. The danger is that the price could get perilously close to the cash cost of production of $290 per ton.

Group shares reached a high of 277p this year, under-performing the rising market, but have now fallen back to 125p, equalling their lowest of the year, in more turbulent conditions. And the short to medium-term outlook for the shares is still not promising, apart entirely from the current stock market woes.

President and chief operations officer Mr Paddy Wright warned yesterday that the turmoil in Asia was more severe and widespread than expected.

With exports no longer required in Asia, the delicate supply/demand position in the US and in European markets is being thrown into disequilibrium, pushing down product prices.

And there are worries about slowing growth in the US economy. This means that long-awaited price rises will not materialise as expected this year. And, depending on the length and depth of the crisis in Asia and US growth conditions, there could be sharp price falls.

In weakening product markets, the group will continue to consolidate with more sales of non-core operations and attention to costs. The containerboard machine in Fernandina Beach in Florida will be sold when the Stone deal is completed and negotiations have started on the sale of the Smurfit Condat mill in France. In addition there are concerns about the merger with Stone, about the strength of the US economy and about market conditions in Latin America. Smurfit is paying $25 a share to buy out the Morgan Stanley stake in JS Corp as part of the JS Corp/Stone Container merger. But the market price of the shares has now fallen to about $12 a share. That means that the group is paying about $260 million more than if it bought the shares in the market - though Morgan Stanley would not have accepted a $12 offer.

There is now some concern that, in deteriorating markets, the group may not be able to squeeze out the cost savings initially expected from the merger. Significant asset disposals were expected to take place quickly. But prices are well off those available when the deal was announced, so sales now would generate significantly less cash than expected. What can the group do? It could defer US asset sales and wait until the market improves. But that would mean the merged operation would have to carry more debt and therefore higher interest costs than anticipated. Or it could sell the assets, raise as much funds as the market will pay, and move on. Either way the group must make difficult decisions.

With the Stone merger, the group bought into strong exposure to the recovery in the US economy. But the reverse holds true too. It could now have undiluted exposure to a possible slowdown in the US economy.