The Investment Column: Tough market means DS Smith is best ignored

A&J Mucklow; Blue Oar


Our view: Sell

Share price: 129.5p (-6p)

If the experts are right and Britain's economy will finally tip into recession by the end of the year, investors are going to find industrial groups increasingly tough to back.

DS Smith is a solid, no-frills, packaging maker that should be a fairly safe bet in turbulent times. However, as its customers suffer, so will DS Smith.

The group announced yesterday that its first-quarter expectations had been hit, with the numbers pretty much in line with this time last year.

It is what the group says it sees around the corner, however, that should have buyers running for the hills. The company is being hit by the double whammy of falling customer demand and rising costs, which will inevitably mean that the group will be unable to pass on its extra charges to its clients.

Not to worry, say analysts at UBS, who argue that, after trimming the group's target price to 170p from 175p, buyers should back the stock. "In our opinion, DSS is better positioned for a down cycle due to weak [sterling], product mix (plasterboard, corrugated), new low-cost capacity in the UK, and Spicers' [a division of the company] recovery. At target, DSS is valued at enterprise value to Ebitda of 5.3 times and price earnings ratio of 10.6 times [next year]."

That may be so and the shares may be inexpensive, but the next six months at least, and probably longer, will be tough for the company.

The market already recognises this, with the stock closing down 4.4 per cent yesterday. Investors will take heart from the fact that Goldman Sachs advised clients that a recent recovery in the stock – it has risen 22 per cent in the past month – was enough for them to take the group off its "sell" list.

In the longer term, investors might be grateful for buying the stock, but, if they do so now, there is likely to be some pain first. Sell.

A&J Mucklow

Our view: Sell

Share price: 250p (+6p)

The fortunes of every sector ebbs and flows with the economic cycle, and, despite struggling today, before too long property companies will be back in vogue.

But not yet, if the Midlands-based A&J Mucklow's full-year results are anything to judge by. Listed companies are usually banging down the door to talk about their numbers, even when they are a bit off. Management teams are invariably convinced by their own rhetoric and believe they can, in most cases, sugar even the bitterest pill.

Not so those at A&J Mucklow, who were trying to keep a low-profile yesterday. In fairness to them, it is not difficult to see why.

On just about ever measure, the group is having a rather torrid time. The headline figure is that the Reit has had to write down £41.2m of losses on its property portfolio, which contributed to an overall pre-tax loss of £26.7m, versus a surplus of £16.3m last year.

Bits of good news like a 12.1 per cent increase in rental charges and a 20 per cent rise in the dividend will soften the blow, but should not convince investors to part with their money.

Watchers at the house broker, Arden, yesterday said investors should buy the stock, arguing that "the shares are currently standing at a 35 per cent discount to the June 2008 net asset value and offer a yield of 7.2 per cent. We believe that this more than discounts the risks of further moves in the yield basis and, with the discount in line with its much more highly geared peer group, the shares are also very attractively valued against other Reits." That may be so, but the entire sector is still toxic. Sell.

Blue Oar

Our view: Sell

Share price: 10.5p (+1p)

Despite putting out a pretty miserable set of numbers yesterday, investors with shares in the investment bank and stockbroker Blue Oar finished the day pretty happy as the stock jumped by 10.5 per cent, largely because the group maintained its dividend and said that its cash position was healthy, at about 10p a share.

Investors, however, would be wrong to take that as a sign that the group is one worth backing. The company said that it had made a pre-tax loss of £1.6m in the six months to 30 June, after a profit of just shy of £1m in the same period last year. Worse still, fees and commission fell by 31 per cent to £6.7m.

Ah yes, but, says chief executive Andrew Monk, the company is undergoing a restructuring and will be a different animal in 2009: if the market suddenly improves, the group could be sitting very pretty, he argues. The break-up value of the group, Mr Monk suggests, exceeds the current share price, and, as a longer-term punt, Blue Oar is worth a bet.

As a financial services group, however, it is tricky to make an investment case for the firm, especially as they see the next six months as being "challenging," which has become managementese for tough.

The group is a tiny player in the financial services industry, and, if investors see that the likes of Lehman Brothers are about to announce yet more writedowns, they are hardly going to turn to Blue Oar as a safe haven. Sell.

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