DS Smith
Revenue £3.8bn Dividends 11.4p
When everything is going as well as it is for DS Smith, one is entitled to wonder how it can go wrong. The answer is not immediately obvious. The company is in the unusual position of being able to outperform in a corrugated packaging market that is fairly low growth, with plenty of opportunity to raise revenues and profits by further acquisitions.
Another was announced yesterday, the second in Spain, bringing to five the number of businesses bought since the start of the last financial year. The company can comfortably spend another £1 billion on in-fill acquisitions in Europe. The latest deal brings its market share to 16 per cent; there is not much to buy in eastern Europe, but the relatively undeveloped packaging industry there allows it to import technologies developed elsewhere. Those acquisitions are important because the company set itself some challenging targets more than four years ago, and the benefits the acquisitions bring are allowing these to be reached and eventually overtaken.
So return on sales of 8.8 per cent in the year to the end of April is at the top end of the guided range, which is being raised to 10 per cent. Likewise, the return on capital is at the top end, though the immediate dilutive effect of those acquisitions suggests that the target will not be exceeded.
The only headwind is the lower euro, which took £21 million off operating profits and will have a similar effect this year. This affects only reported profits, though, because each business operates in the local currency.
Cash generation had accelerated and debt fell by as much as £100 million more than some in the City had been expecting. This is in part due to tighter control of working capital and in part because some of those borrowings are in euros.
A last positive: volumes of corrugated material grew by 3.1 per cent, ahead of the average and indicating further gains in market share, and that rate of growth accelerated into the second half.
All this allowed a 20 per cent rise in pre-tax profit to £200 million. The shares, which have risen sharply since the autumn, added another 14½p to 390½p. An earnings multiple of 15 does not look cheap, but they are still worth buying long term.
MY ADVICE Buy long term
WHY The shares are on a high multiple but the record for growth from acquisitions is a strong one and there are opportunities to come
John Wood Group
Value of BP contract $250m
John Wood makes much of its “asset light” reimbursable business model, which means it is in no danger of seeing the sort of contractual disasters that have hit the likes of Petrofac. As a result, the shares have had a good run since the start of the year, but they are in danger of outpacing events.
The company is by its nature heavily exposed to oil and gas, with about 40 per cent of the workload of its PSN Production Services division coming from the US, mainly shale.
The trading statement makes it clear that, while first-half profits will be down on last year, the full-year outturn will be in line with market forecasts. This is mainly because savings, identified at $30 million, will come in higher than expected, perhaps $50 million, now that 10 per cent of the workforce has been shed.
This is in line with the strategy adopted by other oil service companies, and against this, prices on what work is being let are under pressure. In particular, a move towards standardisation of parts means fewer engineering hours put in by companies such as John Wood.
The company has reiterated a commitment to raising dividends by double-digit percentages. This is good for investors, but some analysts worry that the falling workload and continuing small infill acquisitions could put pressure on the balance sheet.
The company was able to announce a small contract yesterday — to run assets sold by BP in the North Sea. The shares, off 5½p at 674p, sell on more than 12 times next year’s earnings and look well up with events.
MY ADVICE Avoid
WHY Shares have come a long way and the outlook is poor
Debenhams
Like-for-like sales flat
Debenhams shares are up by a fifth since I tipped them at the start of the year, so it is reasonable, after some lacklustre third-quarter figures, to wonder how much further they have to go.
Like-for-like sales were flat in the 15 weeks to June 13. This takes in an unusually cool May that affected women’s fashion. In addition, the spring launch was pulled forward into the first half.
Adjust for this and like-for-likes showed a respectable 1 per cent rise; strip out exchange rate effects on earnings in Ireland and Denmark, and they were up by 2.1 per cent.
Debenhams’ revival has been based on three strategies — it is about halfway through cutting the excessive promotions seen previously, the importing of guest retailers such as Patisserie Valerie and BHS lighting means about half of the estimated 1 million sq ft of underused space will be occupied by next spring and the online offering has been revamped and is ready to take advantage of increasing web sales.
The shares added another penny to 91¼p. They still sell on 12 times earnings. Some might be tempted to take the profits but I think they have further to go in the long term.
MY ADVICE Buy long term
WHY Turnround programme still has a way to run
And finally . . .
Shares in Norcros have made little headway since a large investor exited in late 2013.
The tiles market remains highly competitive, no matter how well UK construction may be recovering, with discounting rife. Now the company, which also makes Triton showers, is raising its exposure to bathrooms with the £21.9 million purchase of Croydex, a Hampshire maker of accessories such as mirrors, cabinets and bathmats. Norcros has also sorted out the various legacy issues that have held back the company in the past.
