Long-term prospects at merged Smurfit group get thumbs up

The merger of Jefferson Smurfit Corporation and Stone Container in the US has generated some excitement about the medium-term prospects for the Jefferson Smurfit Group share price. The shares, which underperformed the market last year, have been volatile of late, hit by uncertainties about the prospects for product-price increases in the US linerboard market.

Now, Davy Stockbrokers forecasts that the group share price should rise to 400p before the end of 1999. Estimating that the deal will add 3p to group earnings per share next year, Davy, which is broker to the group, has increased a pre-merger share-price forecast of 300p before the end of 1998. Currently trading around 245p the share price jumped to 277p after the long-expected merger deal was announced, but has slipped back subsequently in weaker markets. But the biggest benefits from the merger will come in the years after 1999, according to Davy. The deal will result in cost savings at the merged US operation. But more important will be the impact of the deal on capacity in the US market. Increases in capacity in bad times as well as good have long been the bugbear of the industry, depressing product prices and therefore profits.

The impact of the consolidation on costs should lead to further consolidation moves in the industry which would benefit all players. With the linerboard market already off its cyclical low, the deal has come at a good time for Smurfit.