The Investment Column: Sidlaw puts the pain behind it

The metamorphosis of Sidlaw, the newly refocused packaging group, is now complete. And not before time, the company's long-suffering investors might say - as high as 352p in 1994, the shares have been in decline ever since, losing around two-thirds of their value.

Sidlaw, which started life as a Scottish jute company, disposed of its textile divisions in the early 1990s before trying its hand at being a mini-conglomerate. After a string of disastrous figures, the company finally abandoned its oil services interests, ousted chief executive Digby Morrow and lashed itself to the mast of the the packaging industry.

So was all the pain worth it? Well, the first indicators certainly aren't bad. Sidlaw's figures for the year to September, released yesterday, showed a 221 per cent increase in operating profit for the core packaging business. This jump in profitability came not from increased prices - the packaging sector is highly competitive - but rather from efficiency gains. Just under half the growth in operating profit from pounds 1.4m to pounds 4.5m was attributable to cost-cutting.

But generating growth from a tiny base, though laudable, is relatively simple. Now that most of the "fat-trimming" is done, the real challenge facing Sidlaw is to build volume and margins and maintain the improvement.

There are a number of reasons why Sidlaw looks well-placed to build on recent successes. First, product positioning. After years of trying to be a Jack-of-all-trades, the company has decided to build on its established position in the high end of flexible packaging. Its client list, which includes Mars, KP and Procter & Gamble, is impressive. It hopes to build on these blue-chip client relationships in the coming year.

Second, commitment to investment in both staff and equipment. Sidlaw has embarked on an extensive capital expenditure programme and also ploughs around pounds 2m a year into product development.

Finally, the balance sheet is healthy. It has minimal gearing and is sitting on around pounds 8m earned from its recent oil disposals. So the company can afford its investment efforts, and looks well placed to make a strategic acquisition or two.

Yesterday's figures, which saw earnings per share rise from 1.6p to 6.1p, held no surprises for the City, and the shares closed up 0.5p at 112p. Charterhouse Tilney's forecast of pre-tax profits of pounds 6.1m this year puts the shares on a forward p/e of around 13. Given the strong growth prospects, this looks good value.