DS Smith PLC – Anticipating further progress following the strong trading momentum.

DS Smith PLC (LON: SMDS) is a corrugated packaging provider in Europe. It also provides plastic packaging services across the world.

Rationale for Valuation – Hold at GBX 407.30

• SMDS anticipates robust free cash flow performance for FY21.
• SMDS business was benefited from the strong performance of the Packaging business along with benefits from the acquisition of Europac and a strong focus on value-added packaging.
• From the technical standpoint, shares were trading well above the short-term support level of 20-day (GBX 388.40) simple moving average price, which reflects an uptrend in the stock.
• For the past three years (H1 FY18 to H1 FY21), the EBITDA margin has remained above 13%, reflecting decent fundamentals.

Key Risks

• Volatile commodity pricing for recovered paper and paper grades can create significant short-term challenges to capture appropriate margins by aligning raw material cost to packaging sales revenues.
• Political and economic implications from Brexit can impact the level of consumer spending and customer demand for packaging products.

Recent News

21 January 2021: Post Brexit, SMDS announced that Luxembourg would be the EU Home Member State of the Company, where the Company's bonds are listed.

Trading Update for the period since 1 November 2020 (as on 3 March 2021)

• SMDS continued to progress well as it witnessed solid box volume performance with differentiated offerings.
• Overall trading continued to be in line with expectations.
• The like-for-like corrugated box volume growth increased against Q2 FY21, while the North American and Northern European regions showed positive performance during Q3 FY21.
• The Company seems confident of delivering results in line with expectations and register further progress as it is witnessing an excellent demand from FMCG and e-commerce customers.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

DS Smith continued to invest for growth in strategic areas, while the Covid-19 pandemic accelerated its structural growth drivers for further market share gains. The Company has also experienced strong momentum across North America and Europe. SMDS has a resilient business model with a consistent FMCG and e-commerce customer base. Overall, the Company seems to be well-positioned to respond to the evolving global landscape. The stock made a 52-week low and high of GBX 244.80 and GBX 435.90, respectively.

Based on the strong trading momentum, and support from the valuation as done using the above method, we have given a “Hold” stance on DS Smith at the closing market price of GBX 407.30 (as on 4 March 2021).

Hiscox Ltd – Challenging year resulted in losses.

Hiscox Ltd (LON: HSX) is an international Insurance Company, which operates through four reportable segments, namely Hiscox London Market, Hiscox Re, Hiscox Retail and Corporate Centre.

Rationale for Valuation – Avoid at GBX 906.80

• From the technical standpoint, shares were trading well below the short-term support level of 20-day (GBX 951.60) simple moving average price, which reflects a downward trend in the stock.
• The outlook is uncertain in the short-term scenario, while the Company has turned into losses.
• No dividend payment was made for FY19 or announced for FY20.
• Return on equity decreased from +2.2% in FY19 to -11.8% in FY20.

Key Risks

• The business operations could be impacted due to the further lockdown situation (Covid-19 outbreak), and with Brexit uncertainties prevailing currently.
• Furthermore, there are financial risks associated with fluctuations in interest rates, inflation rates and exchange rates. The other risks include unfavourable policies of regulatory authorities and unsuccessful integration post-acquisition.

Recent News

15 January 2021: Hiscox responded to Supreme Court Judgment and confirmed that its COVID-19 estimate has been increased by $48 million net of reinsurance for business interruption.

Financial Highlights for the year ended 31 December 2020 (as on 3 March 2021)

(Source: Company Website)

• During FY20, the net premium earned slightly increased; however, the Company reported loss before tax due to Covid-19 challenges.
• The Company witnessed positive rate momentum in the London market, and strong capital position was maintained.
• The Group had taken proactive actions to protect the balance sheet; however, net asset value per share declined in FY20 against FY19.
• Following the cancellation of the FY19 dividend, HSX didn’t recommend dividend for even FY20.

One Year Share Price Chart

   (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Book Approach (NTM) (Illustrative)

Conclusion

Although the revenue slightly increased in FY20, and credit rating agency S&P has maintained an "A" rating for financial strength, Hiscox has finished the year with losses. Moreover, there are uncertainties regarding the short-term outlook, which makes the investment perilous at the current point. Notwithstanding, rates are rising across all business areas now, and the Group has been investing for significant future opportunities. However, challenges arising from economic contractions, and UK business interruption cannot be ruled out. The stock made a 52-week low and high of GBX 635.40 and GBX 1,254.00, respectively.

Based on the loss making state, uncertain outlook, economic instabilities and support from the valuation as done using the above method, we have given an “Avoid” stance on Hiscox Ltd at the closing market price of GBX 906.80 (as on 4 March 2021), while we look forward to reviewing how the Company would recover from the damage this year.

*All forecasted figures and Peer/Industry information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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