DS Smith (SMDS) is in an expansive mood. The recycled packaging group not only raised its full-year dividend by nearly a fifth, but also announced a $920m (£722m) deal - $1.15bn including assumed debt - to acquire an 80 per cent stake in the holding company of Interstate Resources Inc, a US-based manufacture of corrugated packaging. When we reiterated our buy call on the shares last August we highlighted "an aggressive acquisition strategy designed, among other things, to place the group at the apex of the sustainable packaging market in Europe". But that's clearly not at the expense of global ambition. With sales of $618m in 2016, Interstate will not only augment its supply chain, but will further diversify its revenue. Currently, 58 per cent of revenue comes from customers in the UK, France, Germany and Italy.
The deal, funded through a £280m placing, plus debt and equity, dwarfs the five acquisitions completed by DS Smith in the period under review, although they contributed around half of the 6 per cent rise in constant-currency revenue. However, it's not all about scale; London-based Creo Retail Marketing and Denmark’s Deku-Pack were brought into the fold to expand capabilities in point-of-sale packaging - one of the fastest-growing segments of the industry.
DS Smith continues to drive efficiencies, manifest in £124m in working capital inflows. These were achieved largely on the back of improved receivables and payables, cited as "an area of opportunity" in terms of the recently acquired businesses. If you're growing scale in this manner, attention will always turn to your capital management, but we don't detect too many worries on that score. Free cash flow of £363m was £125m in advance of the FY2016 comparable, while cash conversion remained well above the target rate at 133 per cent. The stake in Interstate will add another £400m to the group's debt, which had fallen slightly to £1.1bn (net) by the period-end. If you factor in the $226m in assumed debt and 2016 profit from the acquisition, the pro-forma net debt to cash profit ratio would increase from 1.8 to 2.2, well within the upper covenant limit.
Stifel gives adjusted profit of £416m for the April 2018 year-end, giving EPS of 35.7p, compared with £391m and 32.5p in FY2017.
| DS SMITH (SMDS) | ||||
|---|---|---|---|---|
| ORD PRICE: | 487p | MARKET VALUE: | £4.64bn | |
| TOUCH: | 486-488p | 12-MONTH HIGH: | 487p | LOW: 369p |
| DIVIDEND YIELD: | 3.1% | PE RATIO: | 22 | |
| NET ASSET VALUE: | 142p* | NET DEBT: | 81% | |
| Year to 30 Apr | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2013 | 3.67 | 82.0 | 7.2 | 8.0 |
| 2014 | 4.04 | 167 | 15.3 | 10.0 |
| 2015 | 3.82 | 200 | 16.6 | 11.4 |
| 2016 | 4.07 | 201 | 17.7 | 12.8 |
| 2017 | 4.78 | 264 | 22.1 | 15.2 |
| % change | +18 | +31 | +25 | +19 |
Ex-div: 5 Oct Payment: 1 Nov *Includes intangible assets of £1.18bn, or 124p a share | ||||
