Monthly Archives: December 2017

Points of View: Bitcoins

At the moment investor news is flooded by the Bitcoin phenomenon.  Bitcoins were the first decentralised digital currency, which were created in 2009 following concerns for the global banking system after the financial crisis.  The price of bitcoins took nearly 5 years to break through $1000 but has recently exploded in value and now fluctuates by $1000 in a matter of hours.

Bitcoins are essentially a string of computer code.  They cannot be printed by a central bank and are instead “mined” by computers solving a complex mathematical problem that unlocks its security.  Every 10 minutes the miner who solves the problem is rewarded with 12.5 bitcoins.  The number of bitcoins rewarded started at 50 and halves approximately every 4 years, up to around 2140 when the last bitcoin will be mined.  This means there is a limit of 21m bitcoins that can exist.  Transactions in bitcoins are only confirmed at these 10 minute mining occurrences.  The transaction history of a bitcoin is known as the blockchain and confirms the current owner of a bitcoin.

So should we consider bitcoins as an investment?  For us, an investment has to be based on certain fundamentals such as its ability to generate an income – without this one cannot calculate an intrinsic value.  On this basis we do not consider bitcoins to be an investment. Indeed, the incremental buyer of bitcoins now seems to be motivated by the fear of missing out and desire to make a quick gain, rather than concerns about the financial system and traditional currencies.  This has all the hallmarks of speculation, not investment.

https://www.nwbrown.co.uk/news/company-report-library/

Advertisements

Stocks in Focus: DS Smith

I last wrote about packaging firm DS Smith in July, following the announcements of its 2016/17 full year results. At the time the company announced that it was acquiring an 80% share of Interstate Resources for $920m. This week DS Smith published its six month results to 31 October 2017.

DS Smith has the majority of its earnings from overseas and is therefore sensitive to foreign exchange movements. The recent results benefitted from a weaker sterling but also showed good organic growth. The highlights included 5.2% like-for-like volume growth and 19% revenue growth (14% in constant currency). However, margins fell, mainly due to an increase in paper costs.

The integration of Interstate is progressing well and the company has upgraded the cost synergy target from $25m to $30m. It also announced in October the €208m purchase of EcoPack and EcoPaper, a packaging and paper group in Romania. The purchase of Interstate is DS Smith’s first venture into the US market. Compared with the European market, the US market is more consolidated, with the top five businesses comprising 74% of the market but it is a region the management has highlighted as an opportunity for expansion.

Growing convenience stores, a switch to e-commerce and the increased importance of sustainability (DS Smith is the largest paper recycling company in Europe) has led a drive towards DS Smith’s packaging solutions. This has helped generate the volume growth seen in the recent results. Later this month the company will be promoted to the FTSE 100 – a testament to the growth it has achieved both organically and through strategic acquisitions. However, going forward, DS Smith will hope to continue passing the higher costs of paper on to customers so that it does not negatively impact margins further.

https://www.nwbrown.co.uk/news/company-report-library/

Stocks in Focus: Prudential Plc

This week I am looking at Prudential, the multinational life insurance and financial services company.  Prudential has had a strong year after economic conditions turned in its favour, reporting a new business profit increase of 17 per cent for the year to September 30. The third quarter trading update also reassured investors that there are still clear structural opportunities in each of its three key markets – Asia, the US and the UK.

Much of the rise in the new business profit has come from the Asian market. This growth is expected to continue to drive the share price going forward. Management are hopeful that the Asian business will double in size every five to seven years thanks to a growing and increasingly affluent Asian middle class that has driven demand and sales.

Elsewhere, the company intends to strengthen its position in the UK asset management market, targeting the retirement income needs of an aging UK population, following its merger with M&G asset management. Prudential also own one of the largest life insurance providers in the US, Jackson National, and expect this area to perform well given the demographic shift of Baby-Boomers moving into retirement.

The Asian business now accounts for over a third of group profits but faces strong competition, with companies such as AIA having a much greater presence in China. Other concerns include how a weakening of the US Macro backdrop could impact the US business, and whether an excessive rise in UK interest rates could threaten the UK annuity business. While the company appears to be well-poised for further growth, these threats are significant.

https://www.nwbrown.co.uk/news/company-report-library/