Its decision to raise the half-way payment to shareholders by 15 per cent to 2.45p suggests it remains confident about prospects.In fact, the company is rightly being cautious over the outlook. It has managed to widen margins in its main paper and packaging operation from 11.4 to to 12.7 per cent as selling price increases have been pushed through even faster than the soaring cost of waste paper. Despite drifting from a peak of 406p early last year, the shares are still not obviously cheap. Fairly priced.Smith surmounts paper problemsDavid S Smith exemplifies the problem facing investors in the paper industry. Having more than doubled and then halved in the space of under 12 months, the price of a key ingredient for over 90 per cent of Smith’s production has made life extremely difficult.It is testimony to the strength of the management that Smith has been able to lift pre-tax profits by nearly 48 per cent to pounds 59.6m in the six months to October. Like its peers, Britain’s largest maker of recycled paper and leading wholesaler of office stationery is looking forward to several more years of rising demand.

But the industry is notorious for its over- optimism, as last month’s profits warning following earlier confidence at Arjo Wiggins amply demonstrates.It is now clear that this year’s destocking has been more than just a blip, an impression that is borne out by the volatility in the price of waste paper this year. After yesterday’s 13p rise to 313p, the shares trade on a prospective priceearnings multiple of 15, falling to 13. The scope for growth was underlined during the first half by orders pouring in 4 per cent faster than sales went out.To satisfy that demand, an pounds 8m investment programme is under way to build three new fire product and safe factories in Indonesia, South Africa and China. Given 13 per cent sales growth from physical security in Asia, Australasia and Africa, compared with no change in America and Europe, that is a sensible allocation of resources.With no real surprises, analysts left their forecasts for this year and next broadly unchanged with a consensus expectation of pounds 100m before tax in the year to April and pounds 110m next time. In a fragmented market, picking up smallish acquisitions of pounds 20m-pounds 50m is the likely expansion route There is no shortage of opportunities. Chubb is represented in more than 100 countries around the world, and while the developed countries of the West can only be expected to replace their existing stock of locks and alarms many other markets have enormous potential. That has led to an impressive increase in cash generation, and a pounds 65m debt burden four years ago has been transformed into a pounds 63m cash pile.How the company chooses to spend that money will be key in determining whether the current good but hardly heart-stopping growth continues or shows a noticeable improvement.

A four-year plan was implemented to widen margins and lift market share which, just over half-way through, appears nicely on target.As the chart shows, operating margins have improved markedly in both the alarms and locks businesses. Earnings per share were up 17 per cent at 9.6p and the interim dividend increased 12 per cent to 2.32p.
When Chubb was demerged it was making an unexceptional return on sales of almost pounds 700m, hardly capitalising on its unrivalled stable of brand names. Pre-tax profits of pounds 44.4m in the six months to October were 13 per cent better than a year ago, bang in line with expectations. They were struck from a 5 per cent increase in turnover to pounds 383.2m. Good growth elsewhere more than made up for a downturn in those markets and the steady improvement since Chubb was spun off from Racal in 1992 continued. He added: “We are totally confident of our analysis of this underperforming business.” Granada has made no official statement on the cost savings it could extract from Forte.Meanwhile, rumours are intensifying that a disposal of Forte’s White Hart chain of hotels is imminent.City Diary, page 22.