Top UK Stocks to Watch: DS Smith confident profitability can improve

DS Smith shares fall as profits take a hit during a tough year, Novacyt shares pop after a transformational year, Aston Martin is in dispute with its partner over Valkyrie payments, Melrose to return cash after selling Nortek Air, and Grafton Group uses M&A to enter Finland.

UK

Top News: DS Smith enters new year as a stronger business

DS Smith said revenue and profits suffered during the recently-ended financial year as the coronavirus pandemic weighed on its performance, but said the business has started to recover and is well-placed to return to growth going forward.

Revenue dipped 1% in the year to the end of April to £5.97 billion and its adjusted operating profit was down 24% to £502 million. Its adjusted earnings per share plunged 27% to 24.2 pence and its reported EPS was down 37% to 13.3p.

Lower prices were to blame for the fall in revenue as corrugated box volumes grew significantly during the year, helped by rising demand for deliveries. Profits suffered as a result of the pandemic, particularly in the first quarter of the year, as well as higher input costs, but saw momentum improve as the year went on.

Although lower year-on-year, the results came in better than expected with analysts having forecast revenue of £5.87 billion and adjusted EPS of 23.64p. Reported EPS came in lower than the 16.77p expected.

Profits were considerably stronger in the second-half compared to the first, while prices are starting to rise following a lift in costs. The US business has delivered a particularly strong recovery.

DS Smith said it is paying a final dividend of 8.1 pence that, combined with the 4.0p interim payout made in December, takes the full-year payout to 12.1p. No dividend was paid the year before as they were suspended when the pandemic erupted. The higher payout came as DS Smith’s free cashflow increased 37% during the year, allowing it to make a significant reduction in debt.

‘Whilst the business has seen reduced profitability over the last twelve months, we firmly believe that we exit 2020/21 stronger, further focused on the accelerated opportunities a post-Covid-19 world offers and that our customers will continue to recognise this going forward,’ said DS Smith.

‘The current year has started well, with the volume momentum of the final quarter of FY21 continuing into this year. Inflationary cost pressures have also continued, in particular old corrugated cases, but also other costs such as energy, transport and labour. Packaging prices have started to increase and we expect to fully recover these increasing costs,’ the company added.

Where next for the DS Smith share price?

DS Smith has been grinding higher since early November, hitting resistance at 450p in mid-June, a 2.5 year high 

Since then, the price has eased back finding support on the 50-day moving average at 423p. The price continues to test this support level.  

A bearish crossover on the MACD suggests there is more downside. However, any move lower need to breach the 50 sma support which could negate the near-term uptrend and open the doors towards 410p the 100 sma. 

On the flip side, should the 50 sma hold buyers could target 437p yesterday’s high ahead of 450p and 490p a level last seen in October 2018. 

Novacyt delivers strong growth despite fallout with DHSC

Novacyt said it delivered stellar levels of growth in revenue and profits during 2020 as demand for its coronavirus tests soared, and said it expects its topline to expand further in 2021 despite the impact from its dispute over a contract with the UK’s Department for Health and Social Care.

Revenue in 2020 soared to £277.2 million from just £11.5 million in 2019, making it a landmark year for the business. Twinned with better margins, Ebitda jumped to £176.1 million from just £200,000 the year before.

Novacyt turned to a profit after tax at the bottom-line of £132.4 million from a £5.7 million loss the year before.

The company also exited 2020 with zero debt on its books after clearing any outstanding payments during the first half. It ended the year with cash of £91.8 million, up from just £1.5 million the year before.

The results sent Novacyt shares up 6.9% in early trade this morning at 386.45p.

‘2020 was a year of transformation for Novacyt as we responded to the worldwide spread of COVID-19. Historically, we have built a reputation for the innovation and high performance of our diagnostic technologies, which allowed us to rapidly respond to the pandemic through the development of a reliable COVID-19 PCR testing portfolio. As a result of supporting an urgent global demand for PCR testing, the future of Novacyt has been secured, having repaid all long-term debt, significantly strengthened the balance sheet, and delivered on a number of strategic objectives to support future growth,’ said chief executive Graham Mullis.

Novacyt developed and launched over 10 new products to aide with coronavirus testing during the year, raised its manufacturing capacity over 100-fold, and struck partnerships with AstraZeneca, GlaxoSmithKline and the University of Cambridge.

One sour note for the year was a dispute with the UK Department for Health and Social Care over a contract for tests, which has cast doubt over a sizeable amount of revenue booked in the final quarter of 2020 and the first quarter of 2021. Novacyt said a judgement has been made that it can replace the product at a maximum cost of £19.8 million, but said the timing of such an outflow depends when the issue is formally settled.

‘At this time, the company is unable to provide further clarification on the dispute or the timing of resolution due to the confidential nature of discussions underway. However, the company has taken legal advice in relation to the dispute and believes it has strong grounds to assert its contractual rights,’ Novacyt said.

Sales in the first five months of 2021 rose to £88.4 million from £40.8 million the year before – however, £40.7 million of that has come from sales to the DHSC and are part of the dispute, demonstrating what is at stake. Excluding sales to the DHSC, sales achieved a monthly run-rate of £10 million in the first quarter but said this fell to around £7 million as lockdown eased and testing rates fell.

Novacyt is expecting demand for private coronavirus testing, such as from workplaces or the travel market, to continue to grow going forward and drive revenue growth over the shorter-term, but said it is still evolving Novacyt into a ‘major diagnostics player’ that isn’t just known for coronavirus tests. It also wants to compliment its existing capabilities with M&A, which will be easier considering the strengthened balance sheet.

Novacyt said the resumption of international travel ‘could lead to higher infection rates, and an increase in testing to return in Q4 2021, in line with Q4 2020, during the winter period.’

‘The company also expects to see significant new growth from the launch of new products during the second half of 2021, including an expansion of its lateral flow antigen testing portfolio for both professional and home use. If demand picks up in line with expectations, the company expects to see full year sales of approximately £100 million, excluding the sales to the DHSC which are in dispute,’ Novacyt said.

Aston Martin launches court proceedings against Swiss partner

Aston Martin said it has initiated legal proceedings against one of its partners in Switzerland after it failed to pay some customer deposits put down for the Aston Martin Valkyrie.

Aston Martin said Nebula Project AG had taken deposits from customers for the cars but failed to pay the luxury carmaker. Aston Martin entered a deal with Nebula Project back in 2016 to help develop the Valkyrie. Nebula Project was set to receive royalties linked to production volumes and its management also run one of the dealerships selling Aston Martin cars.

Aston Martin said it has now terminated the deals and will not pay any royalties to Nebula Project and has also struck-off the dealership, AF Cars AG, which runs Aston Martin St Gallen in Switzerland, from its books after it sold cars to customers in breach of its agreement.

The company said it is prioritising customers in Switzerland and ensuring they still receive their Valkyrie cars on time despite the fact Aston Martin has not received the deposits for them. Valkyries are expected to start being delivered in the second half of this year.

‘There are no other agreements like this in place and going forward the company will ensure that all deposits for special vehicles are received directly by Aston Martin, not through a third party,’ said the carmaker.

The ‘extraordinary event’ will have short-term financial impacts for Aston Martin. It said cashflow and Ebitda in 2021 will both take a hit of up to £15 million in 2021, which is expected to be booked in the second quarter. However, Aston Martin said it expects the long-term impact to be positive as the amount of royalties due to be paid are greater than the funds lost. It said the negative impact expected in 2022 can be managed within its existing expectations.

The news sent Aston Martin shares down 2.5% in early trade this morning at 1888.5p.

Excluding the £15 million hit, Aston Martin said it remains on track to deliver its guidance for 2021 and said it is still targeting to be making 10,000 wholesale deliveries, generating £2 billion of revenue and £500 million worth of Ebitda by 2024/25.

‘Aston Martin has performed well year-to-date during 2021, following the successful completion of the supply to demand rebalance for GT/Sport cars, continuing excellent progress on Project Horizon and with good forward visibility for both GT/Sport and DBX,’ said the company.

Melrose Industries to return cash to investors after selling Nortek Air

Melrose Industries said it has completed the £2.6 billion sale of Nortek Air Management to Madison Industries, paving the way for it to return £730 million in cash to shareholders.

Investors will receive 15 pence per share under the distribution of cash. The remainder of funds will go towards plugging the UK pension gap at GKN and to reduce debt so leverage will be below 2x annual Ebitda at the end of June 2021.

Nortek Air Management was one of the businesses acquired when it bought Nortek back in 2016.

‘The disposal proceeds, plus more than £700 million of cash generated by the Nortek businesses under our ownership and the retention of the Ergotron and Nortek Control businesses in the group, means we are well placed to achieve the targeted doubling of shareholders' investment on the Nortek acquisition,’ Melrose said.

Notably, Melrose intends to carry out the distribution by issuing a new class of B2 shares to its shareholders, who will be able to redeem them for 15p each in cash. After that, it plans to consolidate its share capital so the distribution will have minimal impact on its share price.

Melrose shares were trading 2.3% higher in early trade this morning at 161.6p.

Melrose warned it is being cautious when it comes to distributions going forward because of the pandemic, but said all of its major businesses had remained cash generative. It said it expects to make ‘another significant return of capital to shareholders next year’ if the early signs of recovery being seen at the moment come to fruition.

Melrose also revealed that it has traded in-line with expectations since the start of 2021. The Automotive and Powder Metallurgy division have both seen a recovery but are suffering from the global chip shortage that is hurting the global automotive industry. Meanwhile, there are some ‘encouraging signs’ for the Aerospace unit that a recovery is about to begin, but DS Smith admitted it was ‘too early to state with certainty’.

Grafton Group to buy workwear and PPE provider in Finland

Grafton Group has agreed to buy one of the largest wholesalers and distributors of personal protective equipment, workwear, tools and spare parts in Finland for EUR199.3 million.

The London-listed building materials distributor and DIY retailer said it is buying Isojoen Konehalli Oy and Jokapaikka Oy, also known as IKH, on a cash-and-debt-free basis using existing resources. The deal is expected to close next month, Grafton said.

IKH sells over 50,000 products, some its own and others from third-parties, across the country and is the second largest seller of PPE and core tools. The company is also planning to expand into Sweden and Estonia by exporting its goods to partners going forward.

IKH reported annual revenue of EUR158.8 million and adjusted operating profit of EUR21.0 million in the year to the end of February 2021. Grafton is expecting the deal to boost earnings immediately upon completion. IKH has grown revenue consistently over the past 20 years and benefits from a lean cost base, Grafton said.

‘The acquisition of IKH is an exciting development that gives Grafton a presence in Finland for the first time and broadens its market position.  It will also strengthen the group's operations in the mainland European market in line with our international development strategy.  IKH is a high-quality business with a strong market position and an experienced management team that provides Grafton with a new growth platform in the Nordic Region. We look forward to welcoming the IKH management team and their colleagues to Grafton,’ the London-listed company said.

Grafton shares were trading 3.1% higher in early trade this morning at 1163.0p.  

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