Profits drop on Covid-19 crisis

The Staffline Group (LSE: STAF) share price has performed strongly over the past year. It’s up almost 50% since last June as hopes around the economic recovery gradually improved. However, the recruitment and training specialist has fallen 2% on Tuesday following the release of fresh financials.

Staffline saw revenues slip 13% year-on-year in 2020 as the public health emergency broke, it announced. These clocked in at £927.6m for the full year. As a result, losses before tax widened to £51.6m from £44.4m in 2019.

While group net fee income dropped 12.7% last year, chief executive Albert Ellis commented that “the impact of the transformation and cost reduction actions resulted in a significant improvement in underlying operating profit in the second half compared to the first.” This meant that full-year profits came in ahead of expectations at £4.8m versus £2.9m a year earlier.

The Staffline share price has fallen, however, as it cautioned that some coronavirus-related turbulence remains. The UK support share said that “market conditions remain volatile” in some of the sectors that are just re-opening following Covid-19 lockdowns.

That said, it noted that “the successful vaccination programme is providing a springboard for a strong recovery in the second half of 2021.” It added that performance in the first quarter of 2021 had exceeded expectations.

Sales suffer at this UK share, too

The James Cropper (LSE: CRPR) share price, meanwhile, is unchanged on Tuesday following the release of its own full-year results. It remains 7% higher than it was 12 months ago.

James Cropper makes advanced materials and paper products for a broad range of applications. And it saw revenues sink by almost a quarter year-on-year in the financial year to March 2021, to £78.8m. Demand for its products sank across the group and sales were particularly badly hit at its core paper division. Turnover here slumped 32% from financial 2020 levels, to £51.4m.

As a result, pre-tax profit at the UK paper share slipped to £1.7m last year from £5.5m in the prior 12-month period.

James Cropper chief executive Phil Wild noted that the brunt of the Covid-19 impact was felt during the first half of the year, with the business witnessing a steady improvement during the remainder of financial 2021. He added that “with the continuation of robust business development throughout, continued innovation and investments restarted, I am optimistic the company is exceptionally well placed to emerge stronger and accelerate growth in each business.”

The company now intends to restart capital investments that were put on ice last year. These include the commissioning of a fourth production line at the technical fibre products (or TFP) division. It also plans to significantly upgrade the finishing capabilities of its paper division.

Upbeat performance

Recycled packaging supplier DS Smith (LSE: SMDS) released an upbeat update on Thursday. It showed the company is on target to deliver on its previous guidance, with volume growth having been impressive. This has been built on the strength of its relationships with pan-European and e-commerce customers. The integration of recent acquisitions is progressing well, and this could help to bolster the resilient organic growth which the company is expected to offer.

In recent years, DS Smith has focused on improving product differentiation through innovation. This has allowed it to generate a competitive advantage which has led to four consecutive years of double-digit earnings growth. That rate of growth is expected to continue into the 2017 financial year and while the next two years are due to see the company’s growth rate fall to around 5-6% per annum, it remains a solid growth play for the long term.

Trading on a price-to-earnings growth (PEG) ratio of 1.9, DS Smith seems to offer robust growth at a fair price. Certainly, there may be cheaper growth stocks available, but the company’s sound business model and solid track record of growth show that it potentially offers a lower risk profile than many of its index peers. Given the uncertainty present in global markets at the moment, its risk/reward ratio seems to be favourable.

High valuation

While specialist paper and advanced materials manufacturer James Cropper (LSE: CRPR) also has an upbeat growth outlook, its valuation already seems to take this into account. The company is due to record a rise in its bottom line of 19% in the current year, followed by further growth of 7% next year. However, it trades on a price-to-earnings (P/E) ratio of 29.5, which suggests its share price could come under a degree of pressure after its 42% gain of the last six months.

Even when the company’s rating and growth rate are combined, its PEG ratio suggests now may not be an opportune moment to buy it for the long term. It has a PEG ratio of 2.3 and while the FTSE 100 may be high at the present time, there could be superior growth opportunities on offer elsewhere.

That’s not to say that the company should be completely discounted. Its strategy appears to be performing well following two years of double-digit growth, while it may offer a degree of stability with Brexit around the corner. However, it may be prudent to await a lower share price before buying it.

In 2008, Mondi changed hands around 121p. Today the shares trade at 1,605p. The momentum in the chart seems strong, so is it worth getting involved now?

Business still growing?

In an update today, Mondi reveals underlying operating profit for the third quarter up 3% compared to last year’s equivalent period, but 12% down compared to the second quarter of 2016 because of lower average selling prices and a lower fair value gain on forestry assets. With a year-by-year perspective, that’s still progress we could argue. 

Meanwhile, cash generation from operating activities largely offset the cash outflows related to the firm’s capital expenditure programme, acquisitions, and payment of the interim dividend. That said, net debt increased during the quarter to €1.56bn, which works out as around 1.7 times the level of last year’s operating profit. That seems reasonable.

Overall, I don’t think there’s anything in this update to halt Mondi’s robust share price momentum. Looking forward, the company expects to benefit from stable or higher selling prices in a number of its key products in 2017 after seeing downward pressure during 2016. The directors reckon costs remain generally stable, the firm’s ongoing capital investment programme is delivering strong returns, and a clear strategy, robust business model and culture of continuous improvement make the top management team confident of continuing to deliver an industry leading performance.

My one reservation

Mondi talks the talk and the firm’s share price and business walks the walk, it seems. City analysts following the firm have pencilled-in a 4% uplift in earnings for 2017. Not massive, but maybe enough to keep Mondi’s shares on their current trajectory. After all, the firm looks attractive on valuation grounds with its forward price-to-earnings (P/E) ratio of around 13 and a forward dividend yield just over 3% with the payout covered almost 2.5 times by those growing earnings.

Everything looks fine and Mondi could continue to be a momentum winner. My one reservation is that the company’s business must surely contain a sizeable element of cyclicality. If we see a slump in economic activity around the world I feel certain that the music will stop on Mondi’s business and share price momentum. However, there’s no sign of that happening now.

In fairness, the whole sector is doing well. Look at James Cropper (LSE: CRPR), for example. The FTSE AIM firm deals in forestry and paper products and shares that traded around 76p during 2009 now change hands at the 1,137p level. It’s true that Cropper’s valuation is a little more racy than Mondi’s. The forward P/E rating runs at 20 for year to March 2018, but that’s justified by City analysts’ estimates of a 21% uplift in earnings that year.