DS Smith squeezed despite rising share

In June, we noted that the group’s improved showing in European markets was “clearly not at the expense of global ambition”. Indeed, the two are intertwined, as the overwhelming majority of its pan-European customers have significant US operations. The group’s $920m (£722m) marquee deal to acquire an 80 per cent stake in Interstate Resources has opened up significant opportunities across the pond, and with the integration process progressing smoothly, management felt able to increase projected annual cost savings by £5m.

That might seem trifling, but when you consider that the adjusted operating margin fell by around 85 basis points to 7.5 per cent, it’s clear that the group doesn’t have much leeway on that score. Higher input and other costs amounted to £124m – and the industry is still struggling with rising paper and pulp prices, as evidenced by the October profit warning by peer Mondi (MNDI). So, even though volumes have been bubbling up nicely, and the group managed to pass through a sizeable proportion of price increases through to customers, earnings remain under pressure.

The input price increases form part of a general rise in commodity prices, although the issue has its complexities. For example, China has stopped imports of several grades of waste paper as a part of a wider environmental crackdown. Paper-based packaging is usually manufactured from either waste paper or wood pulp, so the ban has effectively led to a fall in waste paper prices and a rise in pulp prices.

Prior to these numbers, JPMorgan Cazenove was forecasting adjusted operating profit of £519m for the April 2018 year-end, giving EPS of 33.9p (from £443m and 32.3p in FY2017).