ii view: DS Smith shares hit three-year high

Input costs are rising, but so are packaging prices and ecommerce demand is strong. Buy, sell or hold?

Trading update from 1 May 

Chief executive Miles Roberts said:

"I am very pleased with the progress made during the financial year to date. We have continued to build on our strong customer relationships resulting in excellent volume growth and good progress towards recovering the significant increasing costs of production through higher prices. Consequently overall trading continues to strengthen in line with our expectations.”

ii round-up:

Paper and packaging maker DS Smith (LSE:SMDS) today reported strong growth in box volumes compared to the past two years as both ecommerce and environmental sustainability trends continued to underpin demand.  

Demand from both the US and Southern Europe had proved particularly strong, with appetite from its Fast-Moving Consumer Goods (FMCG) customers also notable. 

DS Smith shares rose by more than 2% in UK trading, bringing their gain over the last year close to 70%. Shares for larger rivals Smurfit Kappa (LSE:SKG) and Mondi (LSE:MNDI) are up by around 55% and 40% respectively over the last year. The FTSE 100 index is up by around a fifth over that time.

There have also been significant increases in demand from DS Smith’s industrial customers, although this forms a smaller portion of its overall customer base given its focus on the resilient and growing FMCG industry. Customers include Amazon (NASDAQ:AMZN), Unilever (LSE:ULVR) and Nestle (SIX:NESN).

Raw material costs had continued to rise given notable increases in the prices of energy and transportation, although strong demand for its packaging products had enabled Smith to raise its own prices and recover these costs. 

Its recently launched service to measure the environmental impact and efficiency of packaging within supply chains had received excellent customer feedback, while new manufacturing facilities in both Italy and Poland have already received customer orders to utilise over half of their capacity. 

First-half results are scheduled for 9 December. 

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 29,000 people in over 30 countries and across more than 300 different sites.

Paper assets are managed to support its packaging operations. Structural growth drivers focus on e-commerce expansion, environmental trends to replace plastic packaging and the requirement for more sophisticated packaging from retailers. 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 the profit margin should not be forgotten. A forecast price/earnings (PE) ratio above both the three- and 10-year averages also suggests the shares are not obviously cheap. 

But exposure to potential further growth in e-commerce remains, and the previous sale of its plastics business has boosted its environmental credentials, with investment in new packaging ongoing. Previous speculation regarding a possible bid from rival Mondi should also be remembered, while a forecast dividend yield of over 3% is not derisory in the current ultra-low interest rate environment. In all, and given the core growth drivers of e-commerce and environmental sustainability, investors are likely to remain broadly optimistic.

Positives: 

• Exposure to e-commerce and environmental trends
• Back paying the dividend

Negatives:

• Valuation not obviously cheap
• Group input costs rising

The average rating of stock market analysts:

Strong hold