Few regard cardboard boxes as an industry of the future, but DS Smith is making a decent fist of it. The paper, cardboard and plastic packaging producer, one of Tempus’s ten picks for year, was battered in the aftermath of the Brexit vote. Happily, the shares have recovered the ground they lost, with good reason.
About two thirds of its earnings are generated in euros, so it will benefit from the dip in sterling. Analysts at Jefferies think that every cent that the euro strengthens against the dollar will add £1.7 million to the bottom line and the City has raised its forecasts for the year. The statement yesterday, to bring investors up to date for the annual meeting, was “steady as she goes”. Volume growth is good (read similar to last year’s organic 3 per cent) and profit margins are up on last year.
While the market was wrongfooted by the Brexit vote, it perhaps ought to have paid closer attention to a deal that DS Smith announced on the day of the referendum alongside its annual results. It acquired Creo, a specialist in making the marketing displays in shops for consumer goods. The deal shows that there are growth spots even in the staid world of making packaging in mature markets.
The company also recently acquired Deku-Pack, a Danish business, the latest in a succession of bolt-on deals that deepen its position in Europe. In an industry with plenty of room for consolidation, DS Smith has earned a mandate from investors to be the one doing the consolidating.
To judge by the annual meeting vote yesterday, there are misgivings over pay. About one in eight shareholders voted against the remuneration report. Miles Roberts, chief executive, is certainly well rewarded, with pay and bonuses of £4.4 million last year, but with Mr Roberts having presided over a 400 per cent total shareholder return since he was appointed in 2010, the company can at least not be accused of rewarding failure.
At 14 times’ next year’s forecast earnings, the shares come at a premium to most of its European rivals. But a sure-footed track record suggests it is worth it. In the meantime, a dividend yield of 3 per cent, based on next year’s likely payout, is not to be sniffed at. Don’t expect fireworks, but DS Smith is a safe bet.
My advice Hold
Why The post-referendum wobble presented a perfect buying opportunity but the company remains well-placed in a consoslidating market
Ashmore
The bears are on the run. Ashmore was one of the most shorted companies in London a year ago, but the doubters are seeing reasons for its shares to jump and have been unwinding their short positions.
The asset manager has been hit hard in recent years by investor fund outflows because of concerns such as the impact of slowing growth in China and American interest rate policy. The company has managed the challenges well and is benefiting from an improvement in its fortunes. An emerging markets rally in the past few months helped and cushioned a previously reported 11 per cent annual fall in total assets to $52.6 billion. This recovery is “underpinned by solid economic fundamentals”, Ashmore believes.
In contrast, the big risks facing investors in developed markets, including over-indebtedness and political upheaval, are not properly appreciated by investors, according to the company.
That may be the case, but the problem (one acknowledged by the company) is that it often takes institutional investors some time to react to macro shifts, which could mean there will be a lag between the recovery in emerging markets and a significant change in investment decisions.
The market has jumped the gun and is expecting a big resurgence in assets under management at a time when net flows are still negative. There will be some serious hiccups along the way as Ashmore’s core markets recover, which may provide better opportunities to buy.
My advice Avoid
Why It is premature to bet on posititve inflows
Tasty
It is a decade since Tasty floated on AIM at 52p to fund expansion of its chain of Dim T restaurants, but fortunately for investors the dim sum concept has long since played second fiddle to its fast-growing Wildwood pizza and pasta brand.
It retains seven Dim T outlets as cash cows, but the focus is on expanding its 48-strong Wildwood chain. A further seven are in the pipeline this year, with fifteen more for next year. That is down on the previously touted 20 openings, but in light of post-Brexit uncertainty management is adopting a “cautious and prudent” approach.
That caution can also be seen in the review of its estate, resulting in two loss-making outlets being put up for sale and three others put on watch. This has crystallised an ugly £3.6 million impairment charge, pushing the group to a half-year pre-tax loss of £2.64 million. On an adjusted basis, pre-tax profits grew by 17.5 per cent to £1.62 million, from sales up 8 per cent to £21.8 million.
The writedown hit the shares, which fell 13½p, or more than 7 per cent, to 170½p, but recent investment in infrastructure should pave the way for more than 100 Wildwoods. The 44 per cent stake held by the Kaye family (of ASK and Prezzo fame) provides further comfort.
My advice Hold
Why Don’t bet against the Kaye family
And finally . . .
A company such as Johnson Service Group with a stock market value of £371 million needs to keep an eye on its debt, which stands at £108.9 million. Still, the dry-cleaning, workwear and linen company reported a 26 per cent increase in half-year revenue and a 23 per cent rise in the interim dividend to 0.80p a share. Most impressive, though, was that pre-tax profit hit £10.4 million, against £1.2 million last year. Johnson is making its presence felt in the high-volume hotel linen market, so expect more acquisitions.
