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DS Smith bucks the cycle

RESULTS: The benefits of DS Smith's acquisition of SCA, along with a focus on structural growth markets, shone through in a tough first half
December 6, 2012

During a six-month period in which DS Smith (SMDS) faced challenges from European economic weakness and the paper cycle, these strong numbers are testament to the benefits of its acquisition and growth strategy.

IC TIP: Buy at 220p

Paper prices did drag on profit margins and the return on sales dropped from 7.6 per cent to 7.4 per cent. However, performance was boosted by a full half-year contribution from SCA Packaging, the Swedish business acquired for £1.28bn in June, compared with four months in the same period last year, as well as by growth from corrugated cardboard and plastic packaging. Accordingly, the group was able to report a 57 per cent increase in underlying operating profit from continuing operations to £123m.

The higher value-added markets of corrugated card and plastic continue to look promising, as does Smith's focus on innovation and sales to fast-moving consumer goods (FMCG) companies - a relatively defensive part of the market. The integration of SCA is ahead of schedule and net debt also looks at reasonable levels following the purchase. Debt now represents just over two times cash profits and is on track to be two times or less by the end of April, at which point further acquisitions could be on the cards again.

Broker Numis Securities expects full-year pre-tax profit of £203m, giving EPS of 16.7p (from £119m and 12.6p in 2012).

DS SMITH (SMDS)
ORD PRICE:220pMARKET VALUE:£2bn
TOUCH:219-220p12-MONTH HIGH:221pLOW: 125p
DIVIDEND YIELD:3%PE RATIO:157
NET ASSET VALUE:118p*NET DEBT:78%

Half-year to 31 OctTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20111.0342.84.601.90
20121.6758.04.802.50
% change+62+36+4+32

Ex-div: 3 Apr

Payment: 1 May

*Includes intangible assets of £1bn, or 110p a share