James Cropper

Pleased as it is with strong half-time sales growth, management at paper-maker James Cropper has warned the second half is likely to be hit by rising prices of paper pulp and energy.

These creeping costs are projected mostly to affect the speciality papers division, which enjoyed 6% sales growth during the first half. Price increases have been scheduled to absorb some of the impact, but the next six months are expected to be roughly flat.

Another external influence on the company has been the weakness of the US dollar, which quashed most of the benefits of the internal investment at the converting division. Thus profits were only in line with last year despite sales rising 6%.

With half its sales made across the Pond, performance at Technical Fibre Products (TFP) was similarly dampened by the weak greenback: profits were flat despite 30% turnover growth within the division. During the half, TFP acquired two key suppliers for £0.5m because, explains finance director John Denman, ‘even though they’re small, they service either very important customers or potentially very large contracts’. This ‘potentially very large’ contract – assumed to be with defence specialist Northrop Grumman to provide a skin for stealth aircraft – is not likely to reach commercialisation until at least 2012.

Finally, the Paper Mill Shop retail arm lost a similar amount last year, despite growing revenues. Denman reckons management now have a better idea of their ideal market, and a restructuring of the company’s estate and offering is imminent.

House broker Brewin Dolphin forecasts that full-year earnings of 19.5p will grow almost 40% to 27.2p for 2009, reducing the forward earnings multiple from 12.3 to 8.8. Forewarned cost escalation will repel the cautious, but the shares look good value and could reward a punt.

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