Spicers on the prowl

Spicers' result for the half year to December was a beauty. Sales grew 6.3% to $635.5m, but the big news was a 49% increase in net profit after tax to $12.5m. The full-year result was even better. Sales rose 9.9% to $1.3bn, net profit was up 49.1% to $26.1m and the final dividend of five cents, fully franked and up 11.1% on last year, brought the full-year dividend to 10 cents a share. Earnings per share came in at 18.9 cents, a tremendous 48.8% up on last year.

New acquisition

Peter Waterworth, Spicers' new head of paper distribution, has made the company's intentions clear, stating that he would be comfortable doubling the company's gearing ratio (now a modest 30.1%), in order to make a major new acquisition, possibly offshore.

The company bought Commonwealth Paper in February, an acquisition that will boost sales in the Australian stationery division by $70m next year. That will account for 5.4% of total sales. Now would seem a good time to go shopping, with almost universally low valuations placed on old economy stocks and the Asia Pacific region set for solid economic growth in the medium term, even if the US were to cool somewhat. An encouraging sign in Spicers' preliminary final result was that its operations in Hong Kong, Singapore and Malaysia more than trebled their contribution to the bottom line, from $900,000 last year to $3.5m this year.

PaperlinX holds 40% of Spicers and is the company's largest shareholder, supplier and competitor, a situation that defies logic but is set to continue. The companies' fates are inextricably linked: they are both set to benefit from general strength in the world pulp paper market, caused chiefly by strong growth in major economies around the world, particularly Europe and the US, but increasingly in Asia, outside sleepy old Japan.

Waterworth has complained in the past about the market's unfairness in trading Spicers at such modest earnings multiples, and we tend to agree. A paper company - due to the bumpy ride its earnings tend to deliver - never deserves to trade at high valuations, but a prospective PER of around 11 looks very cheap.

When looking at PaperlinX in issue 53, we suggested the prospects for paper makers were good.

Both PaperlinX and Spicers trade on similar multiples - between 11 and 12 - sell into similar markets and PaperlinX owns a large chunk of Spicers. PaperlinX is roughly three times the size of Spicers with greater liquidity, which helps to avoid an unduly bumpy share price. Nevertheless, investors looking for a good dividend yield can ACCUMULATE.