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DS Smith boxes clever with ‘Made2fit’

The packaging group looks set to dump its plastics division
December 7, 2018

DS Smith (SMDS) has received the green light from the Board of the Spanish Securities Market Commission to acquire Spanish packaging company Europac. A regulatory hurdle overcome, but also significant in the context of the substantial reduction in net debt – a temporary effect that will shortly be reversed in order to pay for the deal, expected to complete in the next month or so. Armed with £1bn (held as restricted cash) from its July rights issue and with £209m in free cash flow, the packaging group has pared back a hitherto hefty burden, reducing the net debt/cash profits (ebitda) multiple from 2.2 to 0.8 since the April 2018 year-end.

IC TIP: Buy at 315p

So, it's in with the new and out with the plastics division. The group expects to sell its profitable plastics business following a review of its operations, which will result in an intensified focus on non-fibre-based packaging, according to finance director Adrian Marsh. This was not a decision taken on environmental grounds, he stresses, adding that the sale should take place towards the end of the financial year, although it's difficult to imagine that the growing opposition to plastics packaging didn't play a part in deliberations.

Clients, which include the likes of Amazon, will breathe a sigh of relief that DS Smith’s process of lifting box-selling sales prices to offset rising paper prices is now complete. Paper represents the largest input cost, and excess industry demand had constrained profitability. Over time, there should be reduced waste of input materials and improved margins due to the June launch of the group's ‘Made2fit’ technology, which allows it to tailor and reduce the size of its packaging. This bespoke offering has significant benefits for online retailers, particularly in terms of reduced freight costs, thereby providing enhanced marketing opportunities for the packager.

Broker JPMorgan Cazenove forecasts full-year adjusted pre-tax profits and EPS of £431m and 41.1p for the April 2019 year-end, up from £345m and 33.4 in FY2018.

DS SMITH (SMDS)   
ORD PRICE:315pMARKET VALUE:£4.4bn
TOUCH:314-316p12-MONTH HIGH:543pLOW: 307p
DIVIDEND YIELD:4.9%PE RATIO:12
NET ASSET VALUE:236p*NET DEBT:20%
Half-year to 31 OctTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20172.661679.104.60
20183.072209.505.20
% change+12+32+4+13
Ex-div:4 Apr   
Payment:1 May   
*Includes intangible assets of £2.1bn, or 150p a share