Paper prices punish PaperlinX bad forecast

The stock market savaged PaperlinX for a late and unexpected 20 per cent downgrade to its profit forecasts for this financial year. Coming after a relatively upbeat prognosis in February, it chopped the share price by as much as 26 per cent to $2.69.

Commenting on the change in guidance, Tom Park, CEO of PaperlinX said, “Having completed our March results and revised forecast, it has become apparent that the assumptions we used in our February guidance are not likely to hold in the fourth quarter. This is disappointing following the positive strategic and executional gains that are being realised across our global business.”

He nominated as a major factor the strong A$/US$ exchange rate which exceeded the company's previous assumptions and is likely to do so for the rest of the financial year. PaperlinX had factored into its forecasts an exchange rate of around 70¢, relying on projections of “top Australian banks”, instead of the reality, which turns out to be 78¢.

The price increases expected to flow through from Europe where PaperlinX gets most of its merchanting revenue will also prove too late to make an impact on this year's results. Instead prices are still cycling downward, according to Park. “In the interim, we have actually seen price deterioration on most grades in the second half up to this point compared to the expectation of firming prices,” he said.

Another factor in the revised forecast was softer than expected second half demand throughout major markets. Restructuring and redundancy costs in a number of areas also had an impact on financial results.

Despite the sharemarket slamming Park was positive, pointing out that PaperlinX's move into international merchanting was, overall, a good thing, particularly in light of the reduction in Australian Paper earnings.

“We have achieved improved returns in our paper merchanting business despite the difficult market conditions faced over the past two years, and see clear opportunities for profit improvement in both our business streams in the 2006 financial year from the strategic decisions put in place this financial year,” said Park.