ii view: bid target DS Smith does what's expected

Third-quarter trading since 1 November

ii round-up:

Takeover target DS Smith (LSE:SMDS) today detailed ongoing resilient trading in a challenging environment, with both its numbers and outlook still in line with expectations. 

The cardboard box and paper products maker pointed to flat like-for-like corrugated box volumes since early November, an improvement on the 4.7% decline seen in the first half. In early February, rival Mondi (LSE:MNDI) said it was considering a possible all-share takeover of DS Smith. 

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DS Smith shares rose marginally in post update trading having gained 18% over the last month following Mondi’s expressed interest. Mondi shares are up 2% over the last month compared to a marginal fall for the FTSE 100 index. Sector giant Smurfit Kappa Group (LSE:SKG) is up around 16%. 

Under takeover rules, Mondi has until 5pm on 7 March to either announce a firm intention to make a takeover/merger offer or walk away.   

DS Smith pointed to good box volume growth during this latest quarter in North America and Eastern Europe, offset by a weaker performance in Northern Europe. Smith customers include Fast-Moving Consumer Goods (FMCG) companies Amazon.com Inc (NASDAQ:AMZN), Unilever (LSE:ULVR) and Nestle SA (SIX:NESN). 

Management highlighted recent FMCG customer contract wins as underpinning confidence in the outlook for volume growth. 

Full-year results are scheduled for 20 June. 

ii view:

Employing around 30,000 people in more than 30 countries, DS Smith is a major provider of sustainable packaging, paper products and recycling services worldwide. The UK and France account for its biggest slug of sales at around 15% each, followed by Italy and Iberia at close to 12%; and Germany and the USA at around 8% to 9% each, with the rest of the world the balance of close to 30%. 

Structural growth drivers focus on ecommerce expansion and environmental trends to replace plastic packaging. Over 80% of all corrugated packaging sold are sent back to its paper mills for recycling. It issued its first green bond in July last year.

For investors, a failure by Mondi to launch an official takeover could reverse some of the share price gains enjoyed since bid talk surfaced a month ago. Tough trading at its Northern Europe operations persists and costs for businesses generally remain elevated. Group net debt rose year-over-year during its last financial year, while the suspension of its small operation in Ukraine should not be forgotten.   

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On the upside, a takeover bid from Mondi could be well received, with the combined businesses strengthening their respective market positions and potentially reducing overlap costs. Expected expansion in ecommerce and a continued move towards more sustainable packaging materials offers growth potential, while management initiatives have helped counter elevated input costs.

Prior to news emerging of interest from Mondi, DS Smith shares were struggling amid a challenging trading backdrop. While the dividend yield is attractive at over 5%, and Mondi could launch an offer for the company above the current market price, there is risk here if Mondi decides not to bid and another potential suitor does not emerge.  

Positives: 

• Exposure to e-commerce and environmental trends
• Attractive dividend (Not guaranteed)

Negatives:

• Elevated input costs
• Uncertain economic outlook

The average rating of stock market analysts:

Buy