ii view: box maker DS Smith hikes prices to tackle rising costs

Shares in this high-yielding paper and packaging firm are down by more a quarter year-to-date. We assess prospects. 

Early year trading update from 1 May to 5 September

Chief executive Miles Roberts said:

"We have started the financial year very strongly, despite the current macro-economic conditions. We are focusing on ensuring the highest levels of security of supply and customer service and are very pleased with the ongoing support we receive from both our customer and supplier base. 

“As we enter the second quarter, we are very mindful of the challenging economic environment in which we operate and the impact it has on both our customers and colleagues. However, our operating plans and progress to date continue to give us confidence in our outlook for FY23."

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ii round-up:

Box maker Smith (DS) (LSE:SMDS) today flagged trading which had remained in line with management expectations, with product price increases and cost control helping to counter rising input costs such as energy. 

Like-for-like corrugated box volumes had declined slightly during the first quarter, although management continued to expect growth of at least 2% for the full year. 

DS Smith shares rose by more than 3% in UK trading having come into this latest announcement down by close to a third year-to-date. Shares for larger rival Smurfit Kappa Group (LSE:SKG) are down by a similar amount, while Mondi (LSE:MNDI) has fallen by around a fifth. The FTSE All Share is down by close to 5% year-to-date. 

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DS Smith, which makes packaging for customers including Amazon (NASDAQ:AMZN), Unilever (LSE:ULVR) and Nestle SA (SIX:NESN), pointed to rising input costs across virtually all areas including energy. However, more than 90% of its natural gas costs are hedged for the current 2023 full year and around 80% for 2024.

The FTSE 100 company also continues to manage its long-term supplier relationships closely in order to help mitigate inflation, along with pushing other cost management programmes. 

DS Smith also announced the retirement of its finance director Adrian Marsh once a successor has been found. Marsh has been with the company since 2013. 

First-half results are scheduled for 8 December. 

ii view:

Started 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. 

For investors, rising input costs and their potential to pressure profit margins continue to warrant consideration. A highly uncertain economic outlook with rising interest rates and even potential energy rationing also require thought. A previous suspending of its small operations in Ukraine is also noteworthy.   

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More favourably, growth in ecommerce and a continued move towards more sustainable packaging materials provide ongoing potential. Product price increases and management initiatives are also helping to counter rising input costs, while an estimated future dividend yield of over 6% should not be overlooked. 

On balance, and while some caution remains sensible, exposure to both ecommerce and green credentials look to offer grounds for longer-term optimism.  

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