FIVE SHARES

TO WATCH
IN 2020
Investing in individual companies isn’t right for everyone. Our shares to watch are for people who understand the risks of investing in
equities. It’s higher-risk as your investment is dependent on the fate of that company – if a company fails you risk losing your whole
investment. Investors should make sure they understand the companies they’re investing in, the company specific risks, and make
sure any businesses they own are held as part of a diversified portfolio.

This year’s shares to watch leans towards profitable,

cash generative dividend payers.

NICHOLAS HYETT
Equity Analyst
We’ve put more emphasis on dividends
than in previous years, with three of the five
companies having prospective yields above
the market average. That’s no accident.
In a world where high growth companies
are richly valued and economic growth
looks uncertain we think it pays to focus
on profitable, cash generative businesses.
It means there’s a bit more cyclicality in
the mix than usual – companies that are
more closely tied to the wider economy.
WPP, Ibstock and DS Smith are all more
exposed here, and their share prices could
suffer if conditions turn sour. However, we
think they have the resilience to weather
turbulence in the long run.
This factsheet isn’t personal advice. If
you’re not sure if an investment is right for
you please seek advice. All investments
fall as well as rise in value so you could get
back less than you invest. Yield figures are
variable and not guaranteed. They should
not be seen as a reliable indicator of
future income.
 IMPORTANT NOTES:
This factsheet is not personal advice or a recommendation to buy, sell or hold any investment. If investors are not sure of the suitability
of an investment for their circumstances, they should seek advice. No view is given on the present or future value or price of any
investment, and investors should form their own view on any proposed investment. Unless otherwise stated estimates, including
prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters.
These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a
guide to the future and investments rise and fall in value so investors could make a loss.
This factsheet has not been prepared in accordance with legal requirements designed to promote the independence of investment
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Information correct as at 25 November 2019 unless otherwise stated. This publication is issued by Hargreaves Lansdown Asset
Management Ltd, One College Square South, Anchor Road, Bristol BS1 5HL who are authorised and regulated by the Financial
Conduct Authority.

However, for all the positives, investors

shouldn’t lose sight of the fact that Ibstock
is a cyclical business. While we wouldn’t
be surprised to see construction activity
bounce as Brexit uncertainty subsides,
any knock to building will hit demand. A
relatively high fixed cost base could make
that particularly painful.

Fortunately management are alive to

that particular threat, keeping debt low
to improve flexibility. At the half year net
debt was below the target range of 0.5-
1.5 times cash profits. Combined with a
healthy degree of cash conversion, that

IBSTOCK Given housebuilding remains a key priority

Foundations for the future
Ibstock is the UK’s largest brick
manufacturer. It doesn’t sound
glamourous, but we think it’s a good
position to be in right now.
Demand for bricks is outstripping domestic
supply. Imports have made up the shortfall,
making up about 19% of all UK bricks. But,
as you might expect, importing bricks
is expensive.
That’s fine when times are good, but
we’d expect the overseas players to be
squeezed out first in tougher times. In the
meantime, the brick shortage has helped
Ibstock hike prices.
for politicians of every major party, and 80%
gives us comfort in the comparatively
generous prospective dividend yield
of new builds use brick to some degree, we of 5.5%, although this could be flexed
can’t see demand crumbling any time soon. if management can find attractive
Ibstock’s smaller concrete business plays investment opportunities.
an important part too, accounting for
almost 18% of profits in the first half. It’s
likely to be the focus of acquisition activity IBSTOCK SHARE PRICE,
going forwards, as management look to CHARTS AND RESEARCH
make smaller bolt-on deals to expand the
concrete offering.
IBSTOCK NET DEBT
Net Debt (£m)
160
140
120
100

One of Ibstock’s key competitive 80

advantages is it controls the clay quarries 60
close to its brickworks. This gives it security
40
of supply and helps to keep costs down,
supporting the highest operating margin 20
among its UK listed peers. 0
2015 2016 2017 2018* 2019e 2020e 2021e

*2018 reflects disposal proceeds received, e = forecast estimate. Source: Refinitiv Eikon, 25/11/19

DS SMITH
The whole package

DS Smith is a paper packaging company.

As almost everything we order online
comes in a cardboard box, and hostility
towards plastic packaging grows, we
expect demand to rise going forwards.

Traditionally, packaging is cyclical – when

the economy booms people want more,
but demand falls in recessions. Lower
demand means both lower volumes
and lower prices. Revenues can go up in
DS Smith is currently chewing through the be a deal breaker. Remember yields are
smoke as a result, a problem compounded
acquisition of Europac – a French, Spanish variable and not guaranteed. Nonetheless
by a largely fixed cost base.
and Portuguese packaging group. Its the increased level of debt and possible
synergy targets have been upgraded, cyclical headwinds mean the shares trade
DS Smith has two advantages here.
but the deal means there’s more debt on a price-to-earnings (P/E) ratio of 10.4,
The first is a large exposure to consumer
on the balance sheet than we’d like. The some way below their long run average.
goods and food, for which demand tends
recent sale of the plastics division will
to hold up rather well when the economy
help here, and reinforces the group’s Overall we think DS Smith is a more
turns. They make up around 70% of DS
environmental position. defensive option with exposure to
Smith’s sales, offering some shelter
attractive end markets. Online sales and
compared to competitors more exposed
DS Smith’s environmental efforts go plastic substitution are structural tailwinds
to industrials.
further however. It’s Europe’s largest that we think are fantastic growth areas to
cardboard and paper recycler which be exposed to.
Secondly, DS Smith only makes about
could make it a popular choice for an
80% of the paper it needs in-house, and
environmentally-conscious investment.
wants to cut that even further to around DS SMITH SHARE PRICE,
60%. Relying on the wider market for CHARTS AND RESEARCH
While the group’s committed to a
supply increases flexibility and means it
“progressive dividend”, the need to trim
should benefit relative to its peers from
debt could see growth slow in the years
lower paper prices – although it also
ahead – although with a prospective
means margins aren’t as strong when
dividend yield of 4.6%, that shouldn’t
times are good.

EARNINGS PER SHARE (GBp)

40

35

30

25

20

15

10

0
2020e

2021e

2022e
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Source: Refinitiv Eikon, 25/11/19, e = forecast estimate.

KEYWORDS STUDIOS GLOBAL GAMES MARKET ($BN)
Asia Pacific North America Latin America EMEA
Game maker’s one-stop-shop
200
Last year we chose Activision Blizzard, 180
developer of the Call of Duty game 160
franchise, as one of our shares to watch. 140
This year we’ve stuck with the gaming
120
theme, although the name’s far less
well known. 100
80
Keywords Studios is a market leader in 60
outsourced design, audio and translation 40
services for game developers. Its expertise
20
ranges from graphics to voice actors to
0
testing. Customers can “pick & mix” the 2018 2019e 2020e 2021e 2022e
services they need at a particular point Source: Newzoo, 25/11/19, e = forecast estimate.
in time.
percentage growth in organic revenues prospective yield of just 0.1%. Investors
It works with lots of the world’s biggest out to 2021 at least. should also bear in mind that, as an
gaming groups, in offices all over the AIM listed business, the group faces
globe. That should it see benefit from Given the services Keywords provides less stringent corporate governance
the broad based growth in the gaming are inherently labour intensive, which is requirements and reduced liquidity, which
market – total gaming spend is expected why developers choose to outsource increases risk.
to rise around 40% in the 4 years to 2022, them in the first place, margins could be
reaching $196bn. a concern. However, the group’s been
able to improve profitability as it’s grown, KEYWORDS STUDIOS
The group’s also been buying lots of with an operating margin of 15.1% last SHARE PRICE, CHARTS
smaller businesses as it looks to build year, and cash conversion is strong. That AND RESEARCH
scale and expertise to serve more of its cash has fuelled the group’s acquisition
clients’ needs. This makes sense to us, as programme while still leaving it with net
Keywords looks to be the go-to provider debt of just €9m.
of video game services.
The group’s quality hasn’t gone unnoticed
The results have so far been impressive. though. The shares trade on a P/E ratio
Since listing in 2013, earnings per share of 26.7 times, which is slightly above
have risen by an average of 72.5% a year, their longer-term average, and offers a
and analysts are forecasting double digit
NOVO NORDISK NOVO NORDISK – REVENUE AND OPERATING MARGINS
Revenue (LHS DKKbn) Operating pofit margin (RHS %)
Growth in hormones
160 50

140 45
Novo Nordisk was one of the first
40
industrial producers of insulin. And 90 120
years later treating diabetes remains its 35
100 30
core business. The group supplies nearly
half of all insulin worldwide, and sales of 80 25
the hormone (which controls blood sugar) 60 20
accounted for 53% of sales last year. 15
40
Diabetes is a chronic rather than acute 10
illness, and sufferers generally use insulin 20 5
for their entire lives. Given the variation - 0
between different types of insulin, lots

2001

2011

2020e
2000

2006

2013
2008
2009

2015
2004

2012

2018
2005

2010
2002

2021e
2003

2016
2007

2014

2017

of patients tend to stick with a particular
brand for decades. That makes sales
regular and reliable.
Diabetes is also an increasingly common
disease. In 1980 there were 108m people
in the world with diabetes, by 2014 that
number had risen to 422m. That rise is
linked to increasing wealth in emerging
markets, a trend that looks set to
continue long term.
However, the pharmaceutical industry’s
come under scrutiny in recent years for
the price it charges patients, particularly
in the US where uninsured patients
can face huge costs. That’s put insulin
firmly in the cross-hairs of the more
radical candidates for the Democratic
presidential nomination. With 48.7% of
sales generated across the
2019e
1999
Source: Refinitiv Eikon, 25/11/19, e = forecast estimate.
pond, a radical overhaul has the potential present the most important, Saxenda, is
to seriously dent profits. growing quickly.
However, we think the group has A dominant market share and attractive
significant opportunities outside end markets would be enough to attract
insulin as well, specifically through its investors’ attention on their own,
GLP-1 products. but Novo also runs a pretty tight ship
operationally. That supports operating
These drugs stimulate the body to margins approaching 45%, and the
produce more insulin after eating, group’s net cash position underpins a
reducing the need to inject insulin straight modest 2.5% yield.
into the body and the associated chances
of complications. Sales of this category
NOVO NORDISK SHARE PRICE,
of drug have been impressive and Novo’s
CHARTS AND RESEARCH
gaining market share as a result. The
group’s also developed new obesity
treatments, and although sales are low at
WPP
Turning a corner?
The unexpected departure of founder
and CEO Sir Martin Sorrell in April 2018 led
to a wholesale review of WPP’s sprawling
media empire.
New man Mark Read now has his feet
firmly under the desk. Some strands
of the strategy are recognisable from
Sorrell’s time at the helm, notably
increased focus on data, technology and
higher-growth markets. But disposals of
‘non-core’ operations and a 60% chunk
of market research group Kantar are
distinctively Read.
The result is a simpler business, which
is easier to grasp after a period of rapid
growth driven by buying other businesses.
The changes should provide a platform
for longer-term growth, as the group
pivots to more attractive opportunities.
The proceeds of the sales have also
helped cut debt to a more manageable
level, despite the smaller size of the
business. We see this reduction as
absolutely crucial to WPP’s long
term prospects.
When the economy takes a turn for the
worse marketing budgets are among the
first in the firing line, and a group laden
with debt will struggle. The increasing
clout of Alphabet and Facebook is
transforming the sector and adds to
uncertainty. More recently the group
has struggled with client losses in the
REVENUE LESS PASS-THROUGH COSTS 2018
North America 34.9%
Asia Pacific, Latin America, Africa & Middle East and
Central & Eastern Europe. 30.6%
West Europe 21.3%
UK 13.2%
OPERATING PROFIT 2018
North America 39.3%
Asia Pacific, Latin America, Africa & Middle East and
Central & Eastern Europe. 30.6%
West Europe 18.2%
UK 12%
Source: WPP Annual Report 2018. Figures may not add up to 100% due to rounding.
key North American market – which being offered an attractive above market
accounted for 35% of first half revenue. dividend today, with potential for a
recovery in revenues, and valuation to
Those headwinds are expected to see boost share prices, tomorrow. As is always
earnings per share fall again this year, and the case though, and especially with
the shares are trading on a P/E ratio of cyclical businesses, shares will rise and fall
10.2, significantly below their long term in value and no dividend is guaranteed.
average. However, with a lot of the heavy
lifting already done, we feel the group
WPP SHARE PRICE,
could be approaching a turning point.
CHARTS AND RESEARCH
The dividend, which currently represents
a prospective yield of 6.1%, is comfortably
covered by earnings and strong cash
generation. In that case investors are
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