James Cropper

AVOID

22/06/2006

This paper maker has been hard hit by energy costs but has a ream of crafty ways to scrap its way out of trouble.

However, this year is going to be ‘tough, if not tougher’ according to chief executive Alun Lewis, with costs of buying gas and wood pulp and discharging effluent all expected to rise.

Speciality papers, the largest operating subsidiary and the only loss-making one this year, is half way through a cost-saving scheme to generate its own steam power through heat recovery. What's more, the creation of a biomass boiler is mooted, which will purportedly reduce gas usage by 25%. Lewis says product developments here include anti-dust papers for industrial clean-rooms, an anti-microbial paper for hospitals and packaging for medical products.

The converting division, which makes such things as picture-mountings and supermarket display boards, is half way through rebuilding a laminator machine. This will cut 11 jobs. New business opportunities include the packaging for cakes and Lewis says the division is ‘on the way up’.

The only division growing profits this year was technical fibres, the supplier of metal-coated carbon-fibre for the US Air Force’s inchoate stealth fighter. Work with Johnson Matthey on research into fuel cells continues.

Finally, The Paper Shop, a five-year-old chain of 23 outlets selling waste paper scraps to arts and craft types is turning a profit despite the group’s retail inexperience. A new management setup has been put in place, an internet offering should be up and running soon and concessions in department stores and gardening centres are planned.

House broker Evolution reminds that Cropper’s ‘huge operational gearing’ is likely to result in upgrades as things turn round, but currently forecasts 0.7p earnings for 2007 and 12.5p for 2008. For the short term at least, this is a stock to avoid.