Company meetings

A spotlight on three of the key companies we've met during the past quarter

James Godrich, Fund Manager
Michael Bray, Research Analyst


Price $174.97
52 week high-low $233.47 – $142.00
Net Yield 1.6%
Hist/Pros PER 14.4 –15.2
Equity Market Cap $825,032m

Technology Lucas Maestri, CFO As the smart phone market matures and iPhone sales slow, the near-term growth potential for Apple now largely centres on its Services business.

Apple has 900 million iPhone users worldwide and a total of 1.4 billion active Apple devices, which includes iPads and Macs. This presents the company with a vast installed base that it can leverage to sell ancillary services to, such as cloud storage and Apple Music. Only around 30% of Apple’s installed base currently pay for some kind of service.

CFO Lucas Maestri says this is underappreciated by some investors, who instead focus on the number of devices sold, particularly iPhones. He believes that not only can Apple increase the adoption of existing services, but can also offer new services like a video streaming service, similar to Netflix.

The emergence of the Services business as a more meaningful source of revenue, has prompted Apple to invest more heavily into hiring people with a background in subscription based models, such as pay TV. Maestri talked about how these individuals have experience in attracting new users, with free trials and keeping them, making their services stickier. The positives for Apple are that Services revenue has continued to grow well, increasing by +19% year-over-year (Q1 2019). Overall margins from Services are also superior to that of Apple’s hardware products, as they require minimal additional costs to provide.

The negatives are that despite Services generating $37bn in annual revenue (fiscal year 2018) the business still only accounts for 14% of Apple’s total revenue. iPhones remain the biggest revenue contributor by some way, at 63%. This begs the question whether Apple’s Services business can offset the declining sales growth of its iPhones.

DS Smith

Price £3.37
52 week high-low £5.42 – £2.86
Net Yield 4.1%
Hist/Pros PER 15.2 – 10.0
Equity Market Cap £4,746m

Until October 2018, DS Smith shareholders would have had nothing but praise for the charming, enthusiastic and at times inspiring CEO, Miles Roberts. The business has grown, both organically and through acquisition, to be one of the largest paper and packaging suppliers across Europe, boasting customers such as Amazon, Nestle, Unilever, P&G and many more.

As an integrated player, DS Smith owns assets that collects used paper and corrugated cardboard from which their paper manufacturing facilities make the recycled paper used in corrugated packaging. They are then able to use their considerable data, knowledge and experience to advise mostly FMCG companies on efficient, innovative and high quality packaging with the aim of reducing cost and driving increased sales.

That story has been helped by tailwinds such as the growth of ecommerce, a shift from plastic to corrugated packaging, falling input costs and ongoing global economic growth.

Against this backdrop Miles Roberts has chosen to increase risk within the businesses through two large acquisitions and a significant increase in leverage above their targeted range. Unfortunately, this has come at the same time as the perfect storm of concerns around a macroeconomic slowdown and the threat of higher input costs squeezing margins.

That cyclical risk against an arguably over-leveraged balance sheet means DS Smith has become something of a binary bet over the short term I believe. Continued cyclical growth should allow the cash generative business to pay down debt, ultimately leaving a larger and more profitable business. However should the macroeconomic tide go out, the concern is that the debt laden DS Smith and Miles Roberts are seen to be swimming without their trunks.


Price £5.76
52 week high-low £7.79 – £4.78
Net Yield 2.3%
Hist/Pros PER 15.6 – 16.3
Equity Market Cap £2,594m

Polly Elvin, Head of IR and David Egan, Group Finance Director In Spring 2017 we wrote that we thought Electrocomponents had ‘a number of continue to brighten their ever optimistic outlook.’ The shares traded then at £4.95 on what seemed an expensive 45x historic PE. We followed that up in Spring 2018 with an article with the shares trading at £6.40 on a less pricey 26x historic PE where we said that ‘a further leg in the share price, we think, relies on two factors... continued strength in global growth...and a shift to sustained profitability in the never-before-profit-making Asian region.’

Whilst we try not to repeatedly write on the same companies for this publication, we think this is another interesting moment to review Electrocomponents. With only one of our conditions having been met (2018 was the year when ‘synchronised global growth’ disappointed) shares have been treading water at best.

What is encouraging though is that, with management having achieved profitability in their Asian operation, they have now set about improving customer stickiness, growing the proportion of counter cyclical revenues and reducing the reliance upon global growth.

They have done this primarily through two small acquisitions, IESA and Monition. IESA is a business that provides value-added services to customers in three distinct areas; sourcing, transaction processing and inventory and stores management. Monition offers condition monitoring and predictive maintenance services. In plain English, these are businesses that allow Electrocomponents to work closer with their customers to improve utilisation and efficiency of the products which they supply.

If Electrocomponents are able to continue to both grow and improve the quality of their earnings then, provided the cycle doesn’t turn against them, there is the potential opportunity of a higher multiple on higher earnings by Spring 2020.






Tate & Lyle
Imperial Brands


Lockheed Martin Corp
DS Smith
Alpha Financial Markets Consulting
Clipper Logistics
Smurfit Kappa Group
Equiniti Group
Automatic Data Processing


Compass Group
Daily Mail & General Trust


Royal Dutch Shell




Jupiter Asset Management
Bank of America Corp
London Metric Property


Vodafone Group
BT Group


United Utilities Group


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