BPI warns of rising costs and effect of sterling weakness

Published on Thursday 8 May 2008 21:42

BRITISH Polythene Industries yesterday warned that the difficult conditions that have been hitting margins have continued this year, with first-half results expected to be "somewhat below" the start of last year.

In a trading statement ahead of its annual general meeting, the Greenock-based company warned it was being hit by rising raw material prices.

In the past four months, it has also suffered from the weakness of sterling and problems in the construction sector.

However, there were some brighter elements to trading.

Company chairman Cameron McLatchie said that a drop in sales to the construction sector "has been more than compensated for by increased demand for other products, particularly silage stretchwrap where we are having a successful early season".

Polymer prices, a key product for BPI, are largely driven by the price of oil, while the weakness of sterling against the euro has accentuated the pressure, with the company sourcing many of its raw materials in Europe.

However, the euro strength is helping the company in other areas, stabilising prices on the continent.

McLatchie said: "Firstly, European profits are being increased by the translation effect into sterling.

"Secondly, currency movement is improving the competitiveness of our UK manufacturing operations, and recently we have been successful in regaining work previously lost to European producers."

Overall, BPI said trading in the first half was expected to be "somewhat behind" the start of 2007, despite sales being ahead of the same period last year, and warning that its outlook for 2008 was for a "challenging" market.

"Improved volumes were not matched by bottom-line results, as we have continued to be affected by the lag in passing on raw-material cost increases and also by substantial increases in the costs of energy," McLatchie told shareholders.

"As a result, our profit before tax in the first quarter was below the same period last year."

Last week BPI announced it had begun consulting with employees at its site at Buckhurst Hill in Essex over plans to close the unprofitable plant, which employs 45. It is planning to move the business to two other sites in Flint and Cowdenbeath.

Brokers Investec yesterday maintained a "buy" rating and its 300p target price, pointing to a 9 per cent dividend yield.

Analyst John Lawson said that, while the comments pointed to difficult conditions, "there are glimmers of hope, as raw-material costs have stopped increasing in Europe and the weakness of sterling against the euro is helping competitiveness".

Investec is forecasting a 22 per cent fall in pre-tax profit to 9.5 million. Shares in BPI rose 2p to 249p, valuing the company at 65.5m.