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DS Smith drives profits despite rising input costs

Packaging company is navigating 'volatile trading conditions' with apparent ease
June 21, 2022
  • Group notes £1.2bn cost increase 
  • Demand for boxes still strong 

2022 was always going to be a tricky year for heavy industry. The cost of energy is still eye-wateringly high, and securing a steady supply of raw materials is no mean feat. Against this backdrop, however, packager DS Smith (SMDS) has done remarkably well. 

Demand for corrugated boxes has continued to increase, with the group noting record volume growth of 5.4 per cent. (This figure is based on the area of corrugated boxes sold.) Despite an “unprecedented rise” in input costs, DS Smith also managed to boost its adjusted operating profit by 23 per cent to £616mn.

How the group managed this is worth further scrutiny. Input costs increased by £1.21bn in 2022, fuelled by a £720mn rise in the cost of raw materials and a £297mn rise in energy costs. However, volume growth of £65mn and price rises of £1.28bn – together with helpful hedging arrangements – managed to more than offset this. 

As a result, DS Smith managed to actively improve its balance sheet, reducing its net debt by £311mn. Its net debt/Ebitda now stands at 1.6 times, compared with 2.2 times this time last year. It has also upped its capital expenditure for next year by around 20 per cent to around £500mn, to help drive efficiencies and growth. 

While it hasn’t met all of its targets – return on sales grew by just 10 basis points to 8.5 per cent, below the desired 10 to 12 per cent – the second half of the year proved more profitable than the first, hinting at good things to come despite wider economic anxieties. 

DS Smith’s results do reveal some less positive trends. The group’s Northern Europe division – which generates around 40 per cent of revenue – saw return on sales drop from 5.8 per cent to 5 per cent. Management said growth was offset by declines in the UK, where ecommerce is not as strong as in the early stages of the pandemic. The group also noted a £29mn impairment relating to an investment in Ukraine.

However, box volumes are expected to keep growing next year – albeit at a slower rate of between 2 and 4 per cent – and DS Smith’s customer base has proved resilient thus far. With a forward price/earnings ratio of just 7.9, the packager is also cheaper than some of its major rivals. Buy.

Last IC View: Buy, 382p, 9 Dec 2021

DS SMITH (SMDS)    
ORD PRICE:292pMARKET VALUE:£4.0bn
TOUCH:292.1-292.4p12-MONTH HIGH:466pLOW: 277p
DIVIDEND YIELD:5.1%PE RATIO:14
NET ASSET VALUE:307p*NET DEBT:36%
Year to 30 AprTurnover (£bn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
20185.5226021.214.4
20196.1735019.716.2
20206.0436821.2nil
20215.9823113.312.1
20227.2437820.415.0
% change+21+64+53+24
Ex-div:06 Oct   
Payment:01 Nov   
*Includes intangible assets of £2.92bn, or 211p a share