Interactive Investor

DS Smith: recovery, dividends and green credentials

22nd June 2021 08:56

Richard Hunter from interactive investor


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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'.

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