The Investment Column: Lesson in Low's fall from grace

Low & Bonar's dramatic fall from grace since its profits warning last October carries a salutary warning. It was surprising that investors had not taken a more cynical look at the company which, despite the well- publicised horrors of the paper and packaging market, was managing to buck the trend. While rivals Rexam and Arjo Wiggins were falling like ninepins, Low & Bonar's tight cost management and acquisitions had been enough to keep profit and margin growth growing. However, with most of the fat cut and big packaging acquisitions passed through, Low has finally run out of momentum and is as exposed as the rest to the pound and cut- throat price competition.

On sales just 2 per cent higher at pounds 215m, profits for the six months to May fell 16 per cent to pounds 23m, walloping margins by almost 2 points to 11 per cent. Though Low is pushing into faster growth areas like plastics, with still more than 60 per cent of its sales in the mature packaging sector, the group has been hit hard by overcapacity in Europe. Customers have been tough and contract prices have fallen by as much as 10 per cent, says Jim Heilig, chief executive. And with raw material prices no longer soaring, packaging groups negotiating contracts are short on pleading power.

Sterling remains a severe problem, lopping pounds 3m off profits, pounds 1.9m from the group's specialist materials business. Though the group's gearing at 27 per cent still leaves room for perhaps pounds 100m of acquisitions in the less competitive niche plastics and speciality side, where customers have less of a stranglehold on prices, the shift will take time. Since the profit warning, Low's shares have fallen from 574p to 262.5p after another 19p drop yesterday. Credit Lyonnais Laing has downgraded full- year forecasts from pounds 54m to pounds 45m. Given the gloomy outlook, 9 times earnings is fair.