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DS Smith raises its sights

The packaging group is preparing for a disorderly Brexit
June 13, 2019

DS Smith (SMDS) lifted its target benchmark for its return on sales off the back of positive price momentum over the year. The packaging group also expects higher cost synergies from its acquisition of Spanish rival Europac than previously envisaged, but signalled that it would not emerge entirely unscathed from a “disorderly Brexit”.

IC TIP: Hold

Corrugated box growth was lower than expected in the second half, which DS Smith blamed largely on an economic slowdown in Germany, missing its growth target of 2.9 per cent. But the group has increased its target range for its return on sales to 10-12 per cent from 8-10 per cent, after achieving a level of 10.2 per cent over its full year, thanks to its price rises. Input costs ballooned as consumers rushed to ditch plastics in favour of paper-based packaging, although the group observed that paper prices have broadly declined since the end of 2018 until April 2019. As DS Smith looks to complete the disposal of its own plastics arm by the end of 2019, it has successfully increased its own sales prices to offset rising input costs. It secured higher box volumes of £27m and a higher pricing and sales mix of £174m, which were dragged down by lower volumes in other areas and input costs of £115m.

DS Smith has revised upwards its anticipated cost synergies associated with Europac, bought in January for €1.7bn (£1.5bn), from €50m to €70m, owing to “head office cost reductions and paper optimisation.” The group expects Europac to significantly bolster its kraftliner containerboard output. The acquisition process contributed to DS Smith’s drop in statutory earnings per share, as a July 2018 equity rights issue raised around £1bn in order to fund the deal. It’s also added significantly to DS Smith’s debt burden, with a net debt to cash multiple now of 2.3, outside of its target ceiling of 2.

The group is stockpiling in anticipation of a chaotic Brexit. It imports some materials, including starch, while its Kemsley mill in Kent exports to continental Europe. It anticipates some impact on customer behaviour. While it recognises that it won’t be entirely insulated from any fallout from Brexit, “we expect disruption to our own operations to be relatively contained”, DS Smith says. Its inventory levels rose nearly 14 per cent over the financial period, while its ratio of average working capital to sales increased to 0.1 per cent from -0.2 per cent.

Broker JPMorgan forecasts full-year 2020 earnings before tax and amortisation at £721m, rising to £775m in 2021.

DS SMITH (SMDS)   
ORD PRICE:342.3pMARKET VALUE:£ 4.69bn
TOUCH:342.2-342.3p12-MONTH HIGH:540pLOW: 286p
DIVIDEND YIELD:4.7%PE RATIO:17
NET ASSET VALUE:227p*NET DEBT:73%
Year to 30 AprTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2015†3.8220015.410.6
2016†4.0720116.511.9
2017†4.7826420.614.1
2018**5.5226021.214.4
20196.1735019.716.2
% change+12+35-7+13
Ex-div:03 Oct   
Payment:01 Nov   
*Includes intangible assets of £3.2bn, or 234p a share **Restated to reflect IFRS 15 accounting standards †Adjustment factor of 0.93 applied to EPS and DPS to reflect July 2018 rights issue