Tag Archives: stock

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: 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: 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/

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/

Stocks in Focus: British American Tobacco

This week I’m looking at British American Tobacco (BAT), which is a leading company in the global tobacco industry. I last wrote about BAT a year ago following its offer to acquire the 57.8% of Reynolds (a US-focussed peer) that it did not already own. The deal was approved by shareholders earlier this year, taking BAT back into the $130bn US market after a 12-year absence.

Shortly after the takeover, the US Food and Drug Administration announced that it aims to reduce nicotine in cigarettes to non addictive levels, causing investors to become more cautious of the tobacco sector. However, the management of BAT reassured investors that the news was not unexpected to the company, and that they continue to focus more on the ‘Next Generation Products’ (NGP) part of the business. The NGP products, which BAT have invested more than $1bn into developing, include Vapour Products like e-cigarettes and Tobacco Heating Products, offering consumers alternatives thought to be healthier than traditional cigarettes. Management have since announced that they will be integrating NGP into their existing business infrastructure, hoping to strengthen an area that is fast becoming a key part of their mainstream business.

Although it is likely that traditional tobacco sales volumes will continue on a downward trend, BAT seem well placed to offer alternatives to consumers, with demand for e-cigarettes continuing to grow. In the meantime, cost cutting and consolidation have enabled earnings and dividends to continue to rise in recent years. Looking forward, investors need to consider whether this can continue – to what extent are NGP products an opportunity and to what extent are falling sales in traditional cigarettes and ongoing regulatory pressures a threat?

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

Stocks in Focus: Centrica

At its recent conference, the Conservative Party revived its plans to protect families on standard variable tariffs. SVTs are the expensive plans that customers are automatically moved to when their cheaper fixed deals end. The government aims to cut gas and electricity costs by £100 a year for 17 million families and the draft energy bill published last week gives energy regulator Ofgem the power to cap SVTs. However, no action will be taken until the new legislation has been passed by Parliament and a decision has been taken on how the actual price cap is calculated – it is unclear how long this will take.

For Centrica, the parent company of British Gas and the biggest energy supplier in the UK, a price cap will certainly make market conditions challenging. The majority of British Gas clients are on SVTs and a cap will result in a fall in revenue, which in turn may put pressure on the company’s dividends. Unsurprisingly, it argues that capped prices will reduce competition in the industry, reduce choice for customers and potentially impact customer service – as supported by the Competition and Markets authority.

Nevertheless, Centrica has demonstrated its fortitude in being able to navigate this regulatory clampdown through a diversified product offering, its cost efficiency strategy and a focus on quality rather than quantity of its customer base. The share price has been weak since the cap was first announced and long-term shareholders need to consider whether this is an opportunity or a threat. Beyond this, the Labour Party’s plans to nationalise several industries, including the utilities sector, give market participants more to think about. For his part, Centrica’s CEO has signalled confidence in the business by buying shares in the company last week.

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

Stocks in Focus: Shell

This week I am writing on Royal Dutch Shell, a company I last wrote about in 2015, when it agreed to buy BG for a consideration of £47bn.

The integration of BG’s assets remains on track and with synergies from this deal and leveraging efficiencies, Shell has stripped $10bn of annual operating costs from its business.  On top of this, the enlarged company is continuing to drive down its debt ahead of targets and has reduced capital expenditure by $20bn.

While the integration of BG’s assets is running to plan, Shell cannot rest on its laurels.  A switch from fossil fuels to more clean energy sources over the long term will put pressure on demand.  One example of this is the move of car manufacturers towards producing electric vehicles (EV) or hybrids.  To counter the move away from fossil fuels, many of the big oil and gas companies are investing heavily in renewable energy solutions.  Shell has committed to invest up to $1bn per annum in “new energy” by 2020, including an investment in hydrogen production to rival the EV market.  While this is a fraction of their overall capital expenditure it shows that the company is trying to future-proof its business as the demand for oil inevitably falls.

Shell also highlights that there will need to be a stable source of electricity when wind and solar are not available.  The management see gas providing this stability and have increased their liquefied natural gas (LNG) capabilities with the purchase of BG.

The success of Shell compared with its peers will be determined by how well it manages this switch to renewable energy sources.  Any heavy investment now would be a drag on cash and the adoption rate for electric vehicles, for example, may be slower than anticipated.  However if Shell delays investing in renewable energy it risks being left behind in a declining sector.

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