Three to buy
DS Smith
DS Smith provides packaging, paper products and recycling services. It’s a fairly “boring” business, “but in these turbulent times, the company’s dullness makes it interesting”. It may be affected by the invasion of Ukraine – it has a stake in a Ukrainian firm that has stopped operations – and by rising costs for producing and transporting paper. But its cashflow is strong and it is passing price rises on. “Our love of online shopping looks here to stay and there are few viable alternatives to a cardboard box”. A safe choice. 311p
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Fresnillo
The Telegraph
Labour reforms in Mexico, staff absences due to the pandemic and delays to major products have all contributed to miner Fresnillo’s underperformance. These issues will continue into 2022, but net cash of £52m should enable it to “overcome an extended period of operational challenges”. It’s starting production at two projects in 2022 and two others should follow in 2024. Gold prices may rise as high inflation and war “remind investors of gold’s historical role as a store of wealth during periods of … turbulence”. 730.2p
Hotel Chocolat
Investors’ Chronicle
Premium chocolatier Hotel Chocolat’s profits for the second half of 2021 were up by 56% to £24.1m. Although the overseas markets of the US and Japan aren’t profitable yet, sales were up 150% and 131% respectively, and nine new stores opened in Japan. Its gross margin was affected due to increased input costs and foreign exchange effects, and the dividend has yet to be reinstated as management prioritises “the need to invest for growth”. But the firm has a promising long-term outlook and a well-performing multi-channel sales model, and the shares look good value. 440p
Two to sell
Dotdigital
Investors’ Chronicle
Software-as-a-service (Saas) provider Dotdigital was boosted by the pandemic as companies were forced to use SMS marketing messages – one of the services it provides – to update customers on a regular basis. But SMS is paid for on a per-message basis, and revenue for this channel is now falling. Management is expecting revenue for the coming and future years to be slower than predicted. Tight labour markets have hindered growth in the US; full-year sales for last year were up 19% compared to only 3% for this year. The shares look far too expensive for a company with “slowing growth that is struggling to get a foothold in the US”. Sell. 74p
Melrose
The Times
Melrose specialises in buying, investing and selling on companies. It has “cast itself as a company doctor” and is currently at a “periodic crossroads, when most of its operations are nearly ready to be sold”. Shareholders will get the money but “the hunt is on for fresh meat”. The shares have fallen since the Russian invasion of Ukraine and the conflict has put on hold plans for another return of capital this year. Its current investments are highly cash generative and analysts predict an increase in profits. But the company has automotive and aerospace operations, both of which are “subject to developments in Ukraine”. The war could boost defence orders and make target businesses more affordable, but “attempts to float the divisions could be delayed” which “could leave Melrose in limbo for an extended period”. Avoid. 113p
...and the rest
Investors’ Chronicle
Chemicals firm Elementis plans to reduce costs, but looks expensive unless its debt pile shrinks. Sell (114.4p). Online shopping “poses a real threat to long-term retail property values” for Hammerson. Sell (35p). Logistics firm Wincanton could be a takeover candidate. Buy (312p). Danish pharma firm Lundbeck is a recovery play on a p/e of ten. Buy (DKK160.6).
The Mail on Sunday
Supermarket Tesco can cope with slow growth and inflation. Buy (273p). Insurer Direct Line pays generous regular and special dividends. Buy (266p). HICL offers a 4.75% yield from infrastructure on long-term inflation-linked contracts. Buy (172p). Thread and zip maker Coats is still innovating in sustainable products. Buy (69p). Self-storage group Lok’n’Store has grown its dividend every year since 2007. Buy (920p). Aim-listed glasses maker Inspecs should pay its first dividend of $0.01 for the year just ended, rising to $0.04 by 2023. Buy (330p).
Shares
BAE Systems will gain from more defence spending. Buy (736p). High gas prices will help biomass firm Drax. Buy (667p).
The Telegraph
Augmentum Fintech invests in early-stage disruptive financial services firms. It’s been hurt by the growth-stock sell-off, but a 17% discount to net asset value isn’t justified. Buy (117.5p).
The Times
Property-services firm Savills will pay a 27.05p dividend to make up for 2019’s skipped payment. All risks are priced in. Buy (1,224p). Hammerson is restarting dividends, but it’s hard to see how it will tempt shoppers away from screens and back into malls. Avoid (33p).
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