Smurfit shares rise after encouraging half-year results

Smurfit Group shares, one of the poorest performing of the major industrial companies in recent years, have been given a strong upward push after half-year results, which were nowhere as bad as had been feared, and bullish comments on future trading.

In heavy trading in Dublin, Smurfit shares jumped 18 cents to €2.88 (£2.27), while in New York, heavy demand for Smurfit's 34 per cent-owned associate Smurfit Stone drove shares ahead strongly. Some analysts had been looking for half-year profits of as little as €15 million (£11.8 million). But as it emerged, Smurfit's half-year profits ended up at €70.1 million (£55.2 million). This was still a sharp fall from first-half profits of €120.3 million (£94.7 million) in 1998 but a far smaller fall in profits than many had feared.

But for the market, the half-year results were largely of academic interests, with far more emphasis being placed on the trading statement and the group's comments on future pricing and supply/demand in the packaging industry.

Smurfit chief financial officer Mr Gary McGann said that the first-half performance was a "cyclical trough" in Smurfit's fortunes with strong indications that the industry was moving towards a period of increased strength after substantial capacity cuts in the US packaging industry and buoyant pricing.

But Mr McGann sounded a strong warning that the industry should not repeat the mistakes of 1995 when producers engaged in over-aggressive price increases that led partly to the subsequent downswing.

"The speed of the industry's recovery has led many to raise the possibility of a further price increase in the current year. In our view, this would be one increase too many. It is time to apply the lessons of 1995 when the industry pushed product prices too far, too fast. The pace of recovery was only matched by the speed of the subsequent downturn."

Later he said: "We have to give it time to get the current prices through and we are calling on the industry not to repeat the sins of 1995."

Containerboard prices in the US have already been raised twice in the past year. Mr McGann said that the industry was moving towards a period of increasing strength "and the most benign planned capacity outlook in 40 years".

ABN-Amro analyst Mr John Clarke, who had published a bullish report on Smurfit earlier this week ahead of yesterday's results, said that he expected the share to push ahead given that Smurfit was trading on a substantial discount to its peer group and was still well off its high of €3.52 (£2.77) last year. "Most importantly there is confirmation that a recovery is under way in most markets and a very strong recovery at that. The share is still a buy following on today's rise," he said.

He added that Smurfit's discount to its American peer group probably reflects its European exposure. With resumed growth in Europe, the valuation gap against the American sector should narrow, he said.

Mr Clarke added that the trading statement from Smurfit was the most positive from the group for years. "The recovery in the American market has been under way since April and there's now no question that the European market is recovering strongly, with big falls in inventories and an average €40 a ton price increase from today [Wednesday]. What's very reassuring is the likelihood of resumed growth from Latin America."