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Questor: DS Smith needs watching but the yield and valuation make it a hold for now
Questor share tip: recent rise in profits could be short-lived if prices come under sustained pressure – but we shouldn’t overdo the gloom
It is fair to say that packaging specialist DS Smith’s interim results last week caused the shares to come a bit unglued on the day, but our lowly entry point of less than 300p in January and the stock’s appealing yield allow us to be patient and stick with the FTSE 100 firm.
The 7pc share price fall last Thursday stemmed from a slowdown in volume growth to just 0.7pc year-on-year in the first half. Analysts are also wondering whether box pricing could start to soften if volumes remain sluggish.
This would be a concern, since a first-half increase in operating margins was nicely underpinned by what management called “good pricing” as well as the cost synergies extracted from last year’s £1.4bn purchase of Europac.
That higher margin in turn drove an increase in profits, on an underlying basis, and therefore supported a pleasing 4pc increase in the interim dividend. Any sustained pricing pressure must therefore be watched carefully.
However, it would not do to overplay the gloom, especially as a forecast price-to-earnings ratio of barely 10 and a yield of more than 4.5pc at least partially reflect these concerns. Such ratios should hopefully mean we are not an undue hostage to fortune if near-term trading does get choppy.
Moreover, the consumer goods portion of the business should remain pretty steady and DS Smith remains well placed for the long term to ride the ecommerce wave.
Debt reduction remains a further leg to the investment case. Lower debt means higher earnings (thanks to reduced interest payments) and, better still, lower risk. Lower risk in turn can mean a higher earnings multiple.
DS Smith is expected to make some £400m from the sale of its plastics business, which should eat into the £2.4bn net debt pile, while operational cash flow forecasts still cover both capital investment and the dividend with room to spare.
The lowly valuation and the yield mean DS Smith still looks like a good option for income seekers in particular.
Questor says: hold
Ticker: SMDS
Share price at close: 368.5p
Update: Centamin
We have yet to strike it rich after our analysis of Centamin in February, but one angle to our investment thesis was the belief that it might be caught in the wave of merger and acquisition activity breaking out in the gold mining business at the time.
It is therefore no great surprise to us to see the announcement of three more deals in the industry. One involves Centamin itself, so we have every reason to keep faith with the stock.
The reason for this deal-making, in our opinion, is the lowly valuations at which gold miners are trading relative to the price of the precious metal, using the American HUI (“gold bugs”) index as a benchmark.
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Canada’s Kirkland Lake has just bid $3.7bn (£2.8bn) in stock for local rival Detour Gold, while China’s Zijin Mining has offered $1.3bn in cash for Toronto-quoted Continental Gold, whose prime asset is in Colombia. Another Canadian firm, Endeavour, has come in with an all-paper bid for Centamin.
The price is just north of 120p a share, based on the predator’s own share price, the offer of 0.0846 Endeavour shares for every Centamin share and the exchange rate between sterling and the Canadian dollar.
Centamin’s management is asserting that shareholders should take no action. We are inclined to agree. Admittedly, Centamin has had its production problems at the Sukari mine in Egypt, but the offer does not look hugely generous, especially at barely 1.4 times historic net asset value, when established producers can trade at up to two times.
Barrick Gold came back with a higher bid for Acacia, so we can happily await developments in the view that Centamin still offers some value.
In other words, a bid is a bonus, not central to the investment case.
Questor says: hold
Ticker: CEY
Share price at close: 127.2p
Russ Mould is investment director at AJ Bell, the stockbroker
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