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DS Smith not immune to pandemic ill effects despite e-commerce boom

The packager is seeing increased volumes following initial disruptions and cost pressures brought about by the pandemic
June 22, 2021
  • Margins contract due to volatile input prices and safety measures
  • Corrugated box volumes registered an 8.2 per cent growth rate over the second half

In its pre-close statement in April, DS Smith (SMDS) said that it was benefitting from gathering momentum through the second half and accelerating consumer trends in online shopping. Fertile ground, one would imagine, for the largest cardboard manufacturer in the UK. Regrettably, there was rather less emphasis on financial performance, though that is perhaps understandable in view of the full-year figures, which detail a 28 per cent fall in adjusted earnings per share and a slight decline in revenue from the prior year.

Before rushing to judgment, it may be useful to take a counter-intuitive view of events over the past year and their effect on performance. DS Smith, which counts retail disruptor Amazon (AMZN) among its client base, not only saw a slump in packaging volumes due to the initial impacts of the pandemic-linked disruption, but it also had to contend with increased volatility in the cost of various raw materials. The group was also forced to take on additional costs simply to keep its production plants operating, while ensuring that its staff weren’t unnecessarily exposed to increased risk of infection. These factors combined to shrink the operating margin to 5.2 per cent, from 7.5 per cent in FY2020.

The group’s business model leaves it exposed to periods when the market for paper is tight, so guaranteeing adequate supplies can be an issue. Inflationary cost pressures have raised the cost of inputs, including ancillary commitments linked to energy, transport and labour, but management has assured that “packaging prices have started to increase and we expect to fully recover these increasing costs”.

And management was also justified in pointing to positive trends over the latter part of the year. Corrugated box volumes grew by 8.2 per cent over the second half, benefitting from new business from fast-moving consumer goods companies in the US and Europe.

While the group’s financials didn’t set the world on fire, the long-term drivers of the business remain in place. The steady shift to online retail has accelerated through the year, and while e-commerce volumes should moderate once the economy fully reopens for business, group profitability should also benefit from reduced volatility in operational costs.

The move away from single-use plastics represents another plus point for the group’s long-term prospects, while the development of two new greenfield corrugated box plants in Italy and Poland suggests that management thinks volumes will only be heading one way over the long run. The shares, therefore, don’t appear to be extravagantly priced at 14 times Jefferies’ EPS forecast for FY2022. Buy.

Last IC view: Buy, 365p, 10 Dec 2020

DS SMITH (SMDS)   
ORD PRICE:424pMARKET VALUE:£ 5.81bn
TOUCH:423-424p12-MONTH HIGH:450pLOW: 249p
DIVIDEND YIELD:2.9%PE RATIO:32
NET ASSET VALUE:258p*NET DEBT:51%
Year to 30 AprTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2017 †4.7826420.614.1
20185.5226021.214.4
20196.1735019.716.2
20206.0436821.2nil
20215.9823113.312.1
% change-1-37-37-
Ex-div:7 Oct   
Payment:1 Nov   
*Includes £3.0bn in intangible assets or 219p a share. †Adjustment factor of 0.93 applied to EPS and DPS to reflect July 2018 rights issue.