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Questor: sell a business, cut debt and make yourself less risky – why DS Smith is worth holding
Questor share tip: it sounds simple, but the packaging firm’s recent disposal of its plastics arm could tempt investors back into the stock
DS Smith’s decision to sell its plastics business to private equity firm Olympus for £450m shows that the packaging specialist is boxing clever on two fronts.
In the long term, the disposal means that the company is addressing environmental concerns over the use of plastic and focusing on sustainable sources of packaging.
More immediately, the firm is cutting its debts. This should help to reassure those investors who feared it had overstretched itself with the £1.5bn acquisition of Spain’s Europac.
Even if the deal is expected to dilute earnings slightly in the near term, thanks to the forsaken profits, lower debt means lower interest payments. Lower interest payments mean less risk. And less risk can mean a higher rating for the shares, which still trade on barely 10 times forecast earnings and yield 4.8pc, thanks to those worries about the balance sheet.
For good measure, the dividend is more than twice covered by earnings, according to consensus analysts’ forecasts.
The company has a strong position in its chosen field, with a solid base of packaging business from consumer goods companies. It also supplies containerboard, the corrugated cardboard used by Amazon and other retailers to protect goods shipped to online shoppers, so the investment case is still sprinkled with some e-commerce magic dust.
The smaller the debt pile becomes, the higher the shares could go, so the cash from the disposal nicely supports the investment case for a stock that still looks cheap.
Questor says: hold
Ticker: SMDS
Share price at close: 339.7p
Update: Derwent London
By contrast with many commercial property landlords, Derwent London has again shown an increase in net asset value (NAV) per share in its latest results. That supports our long-standing investment thesis for the real estate investment trust (Reit), which still looks like a good long-term holding even after a one-third rise in the share price since our first look at them in November 2016.
Vacancy rates across its portfolio are near historic lows at 1.8pc, so demand for its properties seems healthy. And although questions can be asked over the health of the economy, and would-be occupiers are proving selective when it comes to choosing sites and cities, this seems to be playing to Derwent’s strengths, as it owns prime assets or development properties in central London.
The shares trade at around a 15pc discount to their historic NAV. That builds in a little safety margin if the economy suddenly takes an unexpected tumble, as does the firm’s pleasingly conservative balance sheet, whose loan-to-value ratio is just 17pc and average debt maturity eight years.
Derwent still offers diversification for patient investors.
Questor says: hold
Ticker: DLN
Share price at close: £32.53
- Read Questor’s rules of investment before you follow our tips. See Questor's tips every day at twitter.com/DTquestor
Update: Pearson
Educational publisher Pearson made a mug of this column in 2018, when it was the best performer in the FTSE 100, at least among those stocks in the index for the whole of the year, but last month’s full-year results did nothing to alter our long-standing concerns over the firm’s business model.
Sales fell by 1pc overall, on an underlying basis, and by more in the US higher education arm. A number of one-off financial items, notably the tax charge, supported earnings per share, so the quality of earnings was not great even if the quantity met the market’s (low) expectations.
- Questor archive: telegraph.co.uk/questor
The disposal of its K12 course materials business last month for $250m was good news and management’s profit guidance contained no new shocks. But there were no pleasant surprises either and the shares don’t look cheap enough, or provide enough yield, given a forecast 20.5p dividend for 2019, to convince us that there is hidden value here.
Moreover, the long-term threat posed by “open educational resources” remains, as evidenced by the breakdown in contract talks between rival firm Relx and the University of California.
Although the dispute centres on the cost of subscriptions to academic journals rather than textbooks, the principle seems to be the same, as more universities try to push back on costs and seek increased access to academic documents.
Pearson still has questions to answer and this column is content to steer clear.
Questor says: avoid
Ticker: PSON
Share price at close: 821p
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