Interactive Investor

DS Smith: recovery, dividends and green credentials

22nd June 2021 08:56

Richard Hunter from interactive investor

Loading

Share on

Already much higher than pre-pandemic prices, professional investors still rate shares in the cardboard box giant highly.

A much stronger second half undid some of the damage caused earlier in the year by pandemic effects, but DS Smith (LSE:SMDS) is set fair to capitalise on the changing environment.

As with so many other companies, changes to the safety and operational requirements at its sites resulted in a pandemic-related spike in costs. At the same time, extreme supply constraints at the peak of the pandemic resulted in higher costs for the recycling of paper and old corrugated cases. Alongside higher input and inflationary costs within raw materials, labour, transport and energy, the company found itself running to keep still.

As a result, pre-tax profit for the year fell by 37% on revenues which declined 1%, although the figures should draw a line under an exceptional year.

In particular, the strong momentum of the second half has continued into the new financial year, which bodes well for prospects, while some of the previously incurred costs will be recovered by higher pricing for customers. 

Within the second half, corrugated box volumes rose by 8.2%, resulting in a full-year improvement of 3.5%, while profit in the US business rose 70%, with H2 outperforming H1 by 63%. At the same time, careful management resulted in a 37% spike in free cash flow, which in turn enabled a reduction of 15% in net debt to £1.8 billion.

Management outlook is cautiously positive, and sufficient to have reintroduced a dividend which now provides a yield of 3% which is prudent in the circumstances, if not punchy in comparison to some of its blue-chip peers.

Most positively, DS Smith is exposed to fast-moving consumer goods, or FMCG's, and the continuing rise of e-commerce in particular. Its previous sale of the Plastics business ticks a box on its ESG credentials, while the company could also benefit from the various packaging alternatives finding their way into the marketplace. 

The turnaround of the business over the latter part of the period has been reflected in a share price which has risen by 30% over the last year, as compared to a hike of 13% for the wider FTSE100 index. With the road ahead now slowly opening up in a post-pandemic environment, the market consensus of the shares has also recently strengthened, and now comes in at a 'buy'.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Disclosure

We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.

Please note that our article on this investment should not be considered to be a regular publication.

Details of all recommendations issued by ii during the previous 12-month period can be found here.

ii adheres to a strict code of conduct.  Contributors may hold shares or have other interests in companies included in these portfolios, which could create a conflict of interests. Contributors intending to write about any financial instruments in which they have an interest are required to disclose such interest to ii and in the article itself. ii will at all times consider whether such interest impairs the objectivity of the recommendation.

In addition, individuals involved in the production of investment articles are subject to a personal account dealing restriction, which prevents them from placing a transaction in the specified instrument(s) for a period before and for five working days after such publication. This is to avoid personal interests conflicting with the interests of the recipients of those investment articles.

Get more news and expert articles direct to your inbox

Sign up for a free research account to get the latest news and discussion, and create your own virtual portfolio.

Free Sign Up