Category Archives: Useful Information

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/

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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/

Stocks in Focus: RBS Group Plc

Following the UK budget last week, Philip Hammond, the Chancellor of the Exchequer announced plans to begin selling the government’s remaining 71 per cent stake in The Royal Bank of Scotland (RBS) towards the end of 2018. It is his intention that the FTSE 100 bank will once again become entirely privatised. At the height of the financial crisis, RBS had no choice but to accept a £45bn government bail-out on the back of the largest annual loss in UK corporate history.

On previous occasions, the Chancellor has avoided setting a deadline until RBS had reached an agreement with the U.S. Department of Justice (DoJ) over a multi-billion dollar fine for miss-selling mortgage-backed securities in the lead-up to the 2008 financial crisis.

Unsurprisingly, the announcement came shortly after a good set of third quarter results, which demonstrated a broadly reassuring outlook for RBS. Following several years at a loss, RBS posted a net profit of £392m for the quarter, which was largely attributed to lower costs and significantly lower restructuring and litigation charges compared to 2016. More importantly, a number of legacy issues it has faced since the crisis appear to be coming to a close including the DoJ fine which the Bank expects to settle in the coming months although it is still unclear what the final bill may be.

It is promising to see that the business appears to be on track to achieve its 2018 targets and hopefully see its first full year of net profit since the bail-out. If its recovery continues, investors should eventually look forward to a reinstated dividend. However, RBS still faces a number of risks given that it is significantly geared towards the UK in the face of Brexit and there are still other litigation cases yet to be settled.

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

Stocks in Focus: Vodafone

This week I am looking at telecommunications giant Vodafone, which recently published its half-year results. For the past couple of years the company has been facing tough competition in Europe and losing market share in Germany, Italy, Spain and the UK. Furthermore, Vodafone had to write-down £4.3 billion earlier this year in India, its most promising growth market, when competition intensified with the introduction of a new mobile carrier that offered six months free service to customers.

However, these concerns seem to be easing as Vodafone surprised investors last week by raising its annual profit forecast. The revised outlook is the result of a stronger than expected start to the year with notable improvements in operating profit, service revenue and cash flow. European operations have performed well with strong performances in Spain and Italy. The group also announced that the merger of its Indian operations with former local rival, Idea Cellular, is progressing well, which gives hope that the combined business can recover in the near future. Management has raised its guidance for full-year profit growth to around 10% from 4%-8% and the interim dividend was increased, which reflects a growing confidence in the future positive performance of the group.

Several undertakings led to these encouraging results, namely improvements in the quality of products and services, investment in networks, cost cutting measures and the merger of underperforming operations. Nonetheless, the cost of delivering these enhancements, including spending on infrastructure and mobile spectrum, is enormous. Investors should not neglect the importance of sustainable revenue and strong cash flow generation when evaluating companies.

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

Stocks in Focus: Fidelity Special Values

This week I am looking at Fidelity Special Values (FSV), an investment trust that has recently released results for the year to 31 August 2017 and is celebrating five years under the management of Alex Wright.

Mr Wright adopts a contrarian and value style to picking stocks. This means that he focusses on finding out of favour companies that he feels are being priced substantially below their true value. This undervaluation usually stems from the market over-reacting to negative news concerning a stock or sector.

The trust sits within the UK All Companies sector and is able to operate in a completely unconstrained manner versus its FTSE All-Share benchmark. This has allowed Mr Wright to have a higher level of exposure to medium and small sized companies relative to his peers. This area is where Mr Wright and his colleagues are currently finding the most value. They are also looking at companies that earn the majority of their earnings in Sterling, as the team feel those with substantial overseas earnings are currently looking more expensive.

With the current uncertainty surrounding markets, the ability to pick stocks successfully on a bottom-up basis becomes evermore important. Mr Wright’s contrarian and value-based approach can sometimes result in a share price that underperforms the wider market in the short-term. However, his track record since taking over the management of FSV in late 2012 is impressive and suggests that his approach is adding value over the long term.

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

Points of View: Interest Rates

On Thursday the Monetary Policy Committee (MPC) voted 7 to 2 in favour of raising interest rates.  This came as no surprise to investors who had priced in a greater than 90% chance of a rate rise.

The market reacted counter-intuitively to the announcement.  The yield on 10 year gilts fell 0.08% and sterling fell 1.4% against the dollar.  Previously the Bank of England (BoE) had given guidance that rates might need to rise faster than markets anticipate.  Instead, the latest announcement said subsequent rate rises would be gradual – a more conservation tone.  The BoE also revised inflation figures downwards and made reference to a negative impact from Brexit on the economic outlook.

One of the main concerns in raising interest rates is the impact it will have on household mortgage payments.  The BoE estimates that the servicing cost of the average mortgage will increase by £15 per month once fully passed on by lenders.  However, the overall impact of this will take time to filter through.  Fewer households own a mortgage than previously and there has also been an increase in the number of households on fixed rate mortgages.

The BoE faces the same problem as the US Federal Reserve, aiming to increase rates so as to prevent a sustained rise in inflation but not so quickly as to damage the economy.  While the BoE have been clear that this rate rise is not a one-off but part of a sustained policy, the market’s reaction has been one suggesting further rate rises are further away than previously estimated.  It is important for the BoE to get interest rates back to more normal levels to allow them more options for the next economic downturn. However, any further increases would put pressure on households and companies struggling to service their debt.

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

Stocks in Focus: Connect Group

This week I am revisiting Connect Group, the UK-based distribution and logistics company, following the announcement of its preliminary 2017 full year results last week.

The last few years have been challenging for the company, which has been managing decline in its traditional newspaper and magazine distribution business whilst focussing on its broader distribution offering.  Having sold off its Education and Care division earlier this year, the group now operates across three key divisions: News & Media (at the heart of which sits Smiths News, the UK’s leading newspaper and magazine distributor), Books and Parcel Freight (predominantly under the Tuffnells brand).

Following a strategic review earlier this year, the group now has centralised leadership teams across all of its divisions with the primary aim of becoming more efficient. Reducing costs is particularly vital in the News & Media division as the downward trend in newspaper and magazine sales looks set to continue – it is therefore encouraging to see that profits for Smiths News rose by £2.7m this year.

Unfortunately, the growing areas of the business did not perform quite so well, with Tuffnells seeing operating profits fall by 20% despite an increase in volumes. The division faced higher variable costs due to erratic volumes on top of one-off costs to upgrade depot facilities. Pass My Parcel, the ‘click-and-collect’ business, is delivering strong volume growth thanks in part to the introduction of a returns service for Amazon late this year. However, the business is still loss-making at this early stage of its growth and is not expected to break even till the end of 2019.

Investors have reacted positively to the update, driving a significant recovery in the share price following a period of weakness. Looking forward, the shares still look cheap on many metrics – although management must ultimately convince the market that the growth areas of the business can offset decline in the traditional newspaper and magazine distribution market.

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