Jefferson Smurfit shares fell to a new low of 90p on the Dublin market yesterday following a series of broker downgrading of 1998 and 1999 earnings forecasts for the packaging group.
The latest forecasts from NCB Stockbrokers are based on a linerboard price of $365 (£240) in the current year, falling to $345 in 1999 butt recovering to $420 in 2000.
And analyst Mr John Conroy has warned that if the merger between Smurfit's American associate, JS Corp, and Stone Container goes ahead, then it will mean that Smurfit's 1999 earnings will be reduced even further to 7.1p although the deal will add to earnings the following year.
The NCB analyst said that the sharp downgradings reflect the outlook for world economies, dollar weakness and the prospect for paper and linerboard prices. On the Stone merger, he states: "The merger with Stone will be dilutive in 1999, JS Corp should repeat the modest profits of 1998 but Stone will continue to to earn significant losses ($365 million at the pre-tax level)."
The NCB note emphasises the need for speedy asset sales if the JS Corp/Stone merger goes ahead, as Stone has capital repayments later this year with another $300 million debt due to be repaid next year. Stone's recent sale of its Snowflake newsprint plant in Arizona covers the first of these payments. But the 1999 repayment, together with forecast Stone losses of $365 million, highlights the need for further asset disposals of over $500 million, says the NCB analyst.
That belief that the merger will have a negative influence on Smurfit's earnings in the short-term is the main reason for the negative attitude in the market towards the shares. There are many in the market who have questioned the desirability of the merger for some time, with a merged group finding it difficult to get acceptable prices for the asset disposals that are crucial to the viability of the merger.
"Clearly, investors are facing a financial risk in the event that the JS Corp/Stone merger goes ahead... The investment in JSCorp/Stone will only be recognised in the shares when the financial risk is seen to be reduced. In the absence of product price recovery this will require early moves on asset disposals," the NCB note states.
