API has packed away its troubles

A CLASSIC mistake made by countless investors is to buy shares in bombed-out companies too early. They should remember the fate of Shakespeare's King Lear who, after many tribulations, said that things could not become worse. Moments later, he was told of his youngest daughter's death. With so-called recovery stocks, timing is everything.

One recovery share which has unmistakably turned the corner is the packaging specialist, API Group, at 613p. Although last year's sales and profits recovered to record levels, Mike Smith, the chief executive, says there is still plenty of scope for further improvements. A factory comes on stream in April, products are being launched in both core divisions and geographical markets are to be developed.

Mr Smith says it is not far-fetched to imagine that, with help from acquisitions, the company could double or treble in size over the next three years. A note published by Henry Cooke Lumsden, the house stockbroker, describes API as "having the potential to be one of the best-performing smaller companies over the next few years".

The transformation in the group's fortunes began in early 1992 with the arrival of Moger Wooley as non-executive chairman, followed shortly afterwards by Mr Smith. Mr Smith had held important positions at two much larger packaging and paper products companies, Avery International and Jefferson Smurfit. When he was asked what changes he needed to make at API, his answer seemed to encompass almost everything. A total change of culture was required to bring the employees much closer to the customer and involved in a process of what he calls "continuous improvement". Before he arrived workers on a project might not even have known who the final customer was. Now not only do they know but if there have been problems with any API products they will have visited the customer and seen the impact of any deficiencies.

In some respects he timed his arrival well. The company had diversified by acquisition in the middle 1980s and was already repenting and refocusing. Mr Smith has only needed to make one disposal to leave the company in its present form as a maker of packaging, speciality coatings and office products.

Although there have been hiccups, for example margin pressure last year because it was not always possible to pass on raw material price increases to customers, API is on a virtuous circle of achievement. The sharp rise in profitability since the 1992 losses have left the group generating plenty of cash to finance both investment and acquisitions. Three acquisitions in 1995 (of NMC Coatings, J & J Makin and Data-Label) have reinforced the group's strengths in higher value-added areas of the packaging market away from the low margin commodity markets to which the group has a shrinking exposure. Part of the profits improvement expected by analysts will come from a full 12-month contribution from the acquired businesses.

Growth, both of sales and profits, is increasingly coming from new products. Areas where the group has capabilities are in anti-corrosion film and paper for shipping computers and car parts and in thermal transfer ribbon, used for bar codes, sell-by dates and prices (for instance, on Marks & Spencer sandwiches). API is the first European company to come up with a water-based product as opposed to the environmentally hostile use of solvents.

The new Macclesfield factory, built at a cost of pounds 10m, will have a sales capacity of pounds 30m to pounds 35m, which compares with total group sales of pounds 104m for the year to September 1995. These are not replacement sales since the factory will be producing metallised paper, a new product for API. Metallised paper uses only a tiny amount of metal and makes an environmentally attractive alternative to packaging materials such as aluminium foil. The group already sells laminated board to many of its target customers such as in the tobacco and whisky industries.

At the recent annual meeting the group reported that trading was going well and ahead of the same period last year. Analysts' forecasts range between pounds 9.5m and pounds 9.75m, against pounds 8.4m for 1995, raising hopes that something over pounds 10m may be on the cards. The prospective p/e on forecast 1995-96 earnings of 30.9p is just under 20, which may not look cheap.

But if Mr Smith is anywhere near right on where he thinks the group is going, buyers will not be disappointed.