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DS Smith grows profits despite box volume decline

The packaging company generated almost £1bn of extra revenue by increasing the price of its products
December 8, 2022
  • Overall market "worse than originally expected"
  • Costs up by £779mn

DS Smith’s (SMDS) interim results encapsulate the puzzle of packaging companies. On the one hand, the report is filled with excellent numbers. Revenue is up 28 per cent year on year, and is 35 per cent higher than the group’s pre-Covid benchmark. This has translated into excellent profit growth: adjusted operating profit comfortably exceeded the group’s £400mn expectations, which were themselves upgraded in October. Meanwhile, dividends have been hiked by 25 per cent. 

And yet DS Smith is not selling more products. In fact, the overall market was worse than the group originally expected, and the number of boxes it sold fell by 3 per cent. Growth has instead been achieved by price increases – big price increases. 

In the six months to 31 October 2022, DS Smith banked an extra £950mn by raising its prices, which easily offset the £64mn lost through the decline in box volumes. The hikes were in response to a £779mn jump in costs, driven by expensive raw materials, and made worse by energy, labour and distribution costs. 

Clearly, however, price rises exceeded cost rises, and the group’s adjusted operating margin widened from 8.2 per cent to 9.7 per cent year on year. This is still lower than DS Smith’s pre-pandemic margin of 11 per cent, but still reassuring for investors who feared packagers would be crippled by production costs. 

The big question is: what happens next? Can growth really be sustained if demand is dwindling? Management is optimistic about the second half of the year, saying it is likely to be consistent with the first. As a result, its full-year performance is forecast to be ahead of previous expectations and the group is hopeful that volumes will improve. Analysts at Jefferies expect consensus earnings before interest, tax, depreciation and amortisation (Ebitda) to increase by about 10 per cent to £830mn-£840mn.

Performance is likely to vary from country to country, however. The UK and Germany have shown “showing higher levels of decline” than other regions “due to overall economic conditions”. As a result, adjusted operating profit fell by 1 per cent in Northern Europe. By contrast, Southern Europe has been boosted by the acquisition of Europac in 2019, with operating profits more than doubling in the period. 

Ultimately, we are optimistic. DS Smith has shown great resilience so far, and is investing in future growth (capital expenditure is expected to reach £500mm this year). Meanwhile, gloomy market sentiment has depressed its share price this year, meaning it is trading on a forward price/earnings ratio of just 8.5, compared with a five-year average of 11. Buy. 

Last IC View: Buy, 292p, 21 June 2022

DS SMITH (SMDS)    
ORD PRICE:321.2pMARKET VALUE:£4.4bn
TOUCH:321-321.3p12-MONTH HIGH:404pLOW: 238p
DIVIDEND YIELD:5.0%PE RATIO:12
NET ASSET VALUE:333p*NET DEBT:26%
Half-year to 31 OctTurnover (£bn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
20213.361759.804.80
20224.3031516.96.00
% change+28+80+72+25
Ex-div:15 Dec   
Payment:31 Jan   
*Includes intangible assets of £2.98bn, or 215p per share