Date: Wednesday 04 Sep 2013
LONDON (ShareCast) - Price discovery is what the Vodafone deal is all about. In sterling terms, Vodafone is getting about 85bn pounds for the stake, whereas its market capitalisation at the end of last week was a smidgeon short of 100bn pounds. Even if you add on 25bn pounds of debt it is clear that the Voda rump was valued fairly cheaply. Further, the transaction leaves a company worth about 45bn pounds, when allowance for debt is made. In turn, that means it is selling at just three times' earnings and offering a dividend yield of more than 5 per cent. In parallel, the rate of decline in organic service revenues, the usual measure, was bottoming out, its latest figures showed. Yes, the resulting company will be a somewhat riskier investment henceforth and it will probably carry out acquisitions given its need to raise the number of services it offers. Nevertheless, they will also inevitably attract a bid premium. This is not the time to hang up on Vodafone, says The Times's Tempus.
Workwear and dry cleaning group Johnson Service Group has come a long way over the last five years. While hiving off its high-volume/low-margin business supplying hotels it also managed to prune and strengthen its portfolio of 500 dry cleaning shops down to 336. As a result its level of net debt has come down from over £200m to only £25.6m. That leaves the firm margin to expand again and build up its restored dividend. The company is sufficiently confident, in fact, to have recently walked away from offers for some lower margin contracts. Nevertheless, the shares have had a good run this year, so further progress may be limited, Tempus says.
Recycled packaging group DS Smith needs to grow earnings per share by 27% so as to meet its targets, so a wobble in Europe would hurt. That is particularly given last year’s gutsy decision to acquire SCA packaging in a €1.6bn transaction, such that it greatly expanded its footprint across Northern Europe. Yet as the single currency area’s economic fortunes turn up that decision is paying off. Hence, for example, in the first quarter packaging volume growth was above target – although it also benefited from recent acquisitions. To boot, the company’s outlook is one of confidence and the firm offers a 3.5% dividend, rising to 4% next year, secured by a dividend cover of 2.2 times’ earnings and 3.7 times’ free cash flow. The company’s management wants to keep the earnings cover between 2 and 2.5 times earnings. So there is plenty of scope for more increases if the full-year figures match the encouraging start. So, despite the shares’ recent impressive run The Daily Telegraph’s Questor team upgrades them to a buy.
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