ii view: box maker DS Smith flags Ukraine hit

Exposure to ecommerce and sustainable packaging continue to offer long-term growth potential, but there are problems too. We assess prospects. 

Third-quarter update for period since 1 November 

Chief executive Miles Roberts said:

“The structural growth trends for corrugated packaging are stronger than ever, and we have strategically positioned the business well to capture these drivers, underpinning our confidence in progress for the remainder of the period and into our next financial year."

ii round-up:

Box maker DS Smith (LSE:SMDS) today detailed the suspension of operations in Ukraine in which it has a minority investment, although also outlined overall group trading which had remained in line with its own expectations.

The carrying value of its Ukrainian investment stood at £23 million as of the end of April and contributed a profit of £4 million during its last full-year results.

DS Smith shares fell by more than 2% in UK trading, leaving them down around a fifth year-to-date. Shares for larger rivals Smurfit Kappa (LSE:SKG) and Mondi (LSE:MNDI) are down by similar amounts during 2022. The FTSE 100 index is down by around 5%. 

• Ian Cowie: Ukraine tragedy could boost the green theme
• Stockwatch: Russian aggression underwrites future for this sin stock

Volume growth and continuing packaging product price increases at DS Smith had more than offset ongoing input cost increases. The maker of packaging for customers including Amazon (NASDAQ:AMZN), Unilever (LSE:ULVR) and Nestle (SIX:NESN), pointed to continued momentum during the second half, with good progress in profitability and cash generation.

Larger DS Smith customers had been generating above average growth, and the company continues to see good momentum for more sustainable packaging solutions. 

Management still expects mid-single-digit percentage like-for-like volume growth for the current financial year to the end of April.

ii view:

Founded as a box making business in the 1940’s, DS Smith is today a major provider of sustainable packaging, paper products and recycling services worldwide. It employs around 30,000 people in over 30 countries.

Structural growth drivers focus on e-commerce expansion and environmental trends to replace plastic packaging. Over 80% of all corrugated packaging sold is sent back to its paper mills for recycling. By recycling cardboard, it can save more than 360,000 trees from being felled every year. Its own environmental goals include net zero CO2 emissions by 2050.

• How to invest for difficult times

For investors, an uncertain economic outlook, interest rate rises on the horizon and ongoing geopolitical tensions, offer reasons for caution. Rising input costs and their potential to pressure the profit margin also remain worthy of consideration. 

On the upside, growth in ecommerce and a continued move towards more sustainable packaging materials are attractive. Previous speculation regarding a possible bid from rival Mondi is worth remembering, while a forecast dividend yield of over 4% is not derisory in the current low interest rate environment. For now, and while some caution looks sensible, exposure to both ecommerce and green credentials offer firm reason to stay long-term positive.  

Positives: 

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

Negatives:

• Rising input costs
• Uncertain economic outlook

The average rating of stock market analysts:

Buy