Investment: Smurfit shows how to survive

ALL THINGS being equal, yesterday's results from Jefferson Smurfit, the Dublin-based packaging group, were impressive. Unfortunately, upsets such as Asia and the rouble crisis mean all is not equal.

For years, the packaging industry has suffered from over- capacity. The problem has been aggravated by US firms building further paper and packaging mills, endangering the whole industry with weaker prices.

That has caused markets to trade packaging companies at a heavy discount. Smurfit has gone the other way, building profits by buying competitors and even closing mills (one example being the current merger of its US operations with Stone Container Corp).

At last packaging firms in the US and elsewhere have begun to follow suit. Alas, says Smurfit, it may be too late. The Asian crisis has reduced orders from US rivals for packaging materials such as kraftline, depressing world prices. Demand for linerboard has also fallen. In the UK, exports of packaged goods have dwindled against imports because of the exchange rate, which disadvantages Smurfit.

On the positive side, the group enjoyed a 55 per cent jump in first-half profits on the back of surging demand in Europe. Food and drink companies, more than half of Smurfit's customer base, have benefited from a jump in consumer spending. That had handsome knock-on effects. Smurfit also boosted profits by increasing its stake in Nettingsdorfer, a packaging group based in eastern Europe.

Consensus forecasts put Smurfit's full-year 1998 earnings at about Irpounds 13.5p per share. But in the light of its comments on Asia, that now looks optimistic. A more realistic figure is Irpounds 11.9p. That gives a forward multiple of 11 times yesterday's closing price of 114p, up 1.5p. Smurfit shares have halved in value in the past few months. But in the current uncertain climate, they are high enough.