An early this month “Pre-close statement” from DS Smith (SMDS) included “corrugated box volumes in and throughout Q2 have returned to growth… The step-change in use of e-commerce is clearly established across our territories with very high demand from customers for e-commerce packaging as we head into the festive season”. The shares responded higher... but the current share price compares to approaching 400p early this year and, with also a dividend expected for the company’s half-year which ended 31st October 2020, there looks further recovery value here...
DS Smith is a FTSE-100 international packaging company, including corrugated packaging for consumer products, e-commerce, promotion, transit and industrial packaging. Recycling and paper manufacture form an integrated part of its operations. With an engineering degree and chartered accountant experience, Chief Executive Miles Roberts was previously Chief Executive of McBride (MCB), before taking his current role in 2010. His remuneration last year totalled £1.5 million, including £0.4 million ‘performance share plan’ and held 1,989,927 shares in the company. Finance Director Adrian Marsh is a qualified accountant with finance experience including from Tesco and AstraZeneca. His remuneration last year totalled £0.8 million, including £0.2 million ‘performance share plan’and he held 521,996 shares in the company.
The latest trading update included “profit for the half year will be lower than the comparable prior year period due to Covid… expect volumes for the H1 period overall to be c. 1.5% lower than the prior year H1”. The prior year first half delivered an adjusted pre-tax profit of £213 million (earnings per share: 17.4p, +5%) on revenue of £3.2 billion (+4%, +3% constant currency), which evolved into full-year £368 million (earnings per share: 33.2p, 0%) on revenue of £6 billion (-2% and in constant currency) as Covid started to have some impact. The balance sheet particularly showed cash of £595 million, total current assets of £2 billion and Property, plant & equipment of £3 billion against debt of £2.5 billion, with total current liabilities £2.2 billion and total non-current liabilities £3.1 billion. However, even the initial Covid ‘shock’ impact looks to have already been significantly mitigated, with “significant improvement in Q2 compared to Q1… remains our intention to declare a dividend for the half year”.
Risks particularly include demand and competition. However, there is a strong focus on costs and margins - the latest update including “Q2 increases in packaging demand are being reflected in upward pressure on paper pricing in Europe and the US, providing a support for corrugated box pricing” - as well as “ongoing market share gains, in particular with our large FMCG and e-commerce customers… We are pleased with the engagement we continue to receive from customers as they increasingly look to us for sustainable packaging solutions, as well as broader stakeholders”. That further suggests the company is well positioned for the current environment.
The current offer price for the shares is 321.8p – which compares to noted previous earnings per share of 33.2p. There is some first half hit to be reported coming up but we’re now looking at growth resuming and a reasonable balance sheet with confidence emphasised by the expected return of dividends – a 4% increased 5.4p per share having been announced for the first half of the prior year (after 16.2p per share for the previous full-year) before being cancelled due to covid uncertainty. The prospects of return to growth and dividend rising to perhaps a 5% yield see us consider there attractive further upside potential from here, targeting a return to around 400p.
This article first appeared on the N50 website which Tom Winnifrith runs with Steve Moore & Lucian Miers. To access the website ahead of the next share tip from Tom & Steve and a new shorting piece this week click HERE
Filed under: DS Smith, Karelian Diamonds, CyanConnode, Conroy Gold & Natural Resources, TomWinnifrith.com
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