Brokers cut Smurfit forecasts

THE decision by London analysts to slash their forecasts for Smurfit Group in the wake of this week's results has only served…

THE decision by London analysts to slash their forecasts for Smurfit Group in the wake of this week's results has only served to bring them into line with their less optimistic Irish counterparts.

However, Smurfit's shares opened down 3 1/2p in Dublin and 4p sterling in London yesterday, following the news that its London broker, UBS, had cut its 1996 pre tax profit forecast from £365 million to £260 million.

UBS also announced it was cutting its 1997 pre tax profit forecast from £340 million to £265 million.

The shares later recovered in both markets, closing unchanged at 160p in Dublin and 161p in London.

READ MORE

Mr Michael Brown, who follows Smurfit for SG Warburg in London, said yesterday he would also be cutting his forecast for Smurfit, possibly to levels below UBS's figures. Other London houses are expected to do likewise.

Davy, the company's Dublin broker, was forecasting pre tax profits of £264 million in 1996 and £160 million in 1997, prior to this week's figures. Riada Stockbrokers forecast pre tax profits of £250 million in 1996 and £190 million in 1997.

Analysts on both sides of the Irish Sea are now in agreement that Smurfit faces two tough years as the international paper and packaging sector goes into cyclical decline.

Prices for most products soared last year but many have subsequently crashed. Pulp prices have fallen by almost a half to $500 (£318) a tonne. Significant overcapacity in some areas of the US industry has also added to the problem and was having an impact on European prices as US companies effectively dump surplus production in the southern European markets.

Smurfit's gloomy prospects are symptomatic of a wider downturn, according to Mr Brown.

Analysts also agreed Smurfit had some advantages over its competitors in such a situation. It has a wide geographical spread and was more highly integrated than many competitors. It produce much of the paper used to make its packaging products, reducing its exposure to changes in pulp prices.

Analysts pointed out that the company had successfully bought other companies at the bottom of the cycle, giving it extra capacity with which to take advantage of the upswing. But with almost £600 million in debt still left over from the 1994 acquisition of Cellulose du Pin for £684 million, another such audacious move would be very brave.

In order to position itself for such a strategy, the company would have to be circumspect about dividend payments over the next two years, despite its adequate dividend cover, analysts warned. This year's record pre tax profits of £420 million gave the group dividend cover of almost eight times.

Where analysts in London and Dublin disagreed was on the outlook for Smurfit in 1997. Most Dublin analysts revised their Smurfit forecast prior to last week's US employment figures, which indicated that the US economy may be doing better than expected.

However, further evidence of economic strength may mean that the fall off in US industrial activity in 1997, which drives demand for packaging, may now not be quite so extreme as many had predicted.

Such thinking lies behind the London analysts' more aggressive forecasts for 1997.

"We are not as pessimistic's some in regard to 1997. It is difficult to see how box volumes can fall heavily again, if you assume reasonable US economic growth," said an analyst at UBS in London.

This was also a theme of the briefing given by the Smurfit group's chief financial officer, Mr Ray Curran, on Wednesday.

The time lag between the revision of the Smurfit forecast in London and Dublin is symptomatic of the company's failure to win over the City of London. Smurfit changed both its stockbrokers and media advisers in Britain last year in recognition of this, but building a strong British shareholder base, similar in scale to AIB and CRH, would take time.

When that has happened, perhaps the City analysts might not wait until the eleventh hour before taking out their blue pencils.

John McManus

John McManus

John McManus is a columnist and Duty Editor with The Irish Times