ii view: Internet and sustainable packaging boost

e-commerce and replacements for plastic packaging are partly offset by a weak auto sector. 

Half-year results to 31 October 2019

• Revenue up 3% to £3.19 billion
• Adjusted operating profit up 15% to £351 million
• Net debt up 7% to £2.44 billion
• Interim dividend up 4% to 5.4p per share

Chief executive Miles Roberts said:

"Our leadership in e-commerce and sustainable packaging solutions has enabled us to perform well despite a difficult macro environment and volatility in paper pricing. The continued growth in margin and strong pricing discipline has been particularly pleasing as we deepen our relationships with FMCG (Fast Moving Consumer Goods) customers and grow market share.

"We continue to capitalise on the strong long-term growth drivers of fibre-based packaging, with our industry-leading innovation driving differentiation in the market. Assuming current macro-economic conditions prevail, we anticipate an acceleration of volume growth in the second half of the year which, together with the resilience of our business model, supports our expectation of further growth in the year."

ii round-up:

Paper and packaging group DS Smith (LSE:SMDS) reported record first-half profits, buoyed by growing demand from online retailers and the contribution from its recently acquired Spanish Europac business. 

Southern European profit jumped by 154%, fuelled by the inclusion of Europac, with strength in Spain and Italy offsetting weaker conditions in France. Good volume growth and lower input costs in Poland and the Baltic region underlay a 21% profit increase, helping to partly offset a 27% fall for its largest Northern European business, impacted by difficult conditions for its industrial customers in Germany and the surrounding Benelux region, particularly in the automotive sector.

Across the pond, its paper-strong and packaging-weak North American business suffered a halving in profits as paper price declines hit and costs for its new Indiana site were taken. 

The sale of its plastics division, driven by customers move away from plastics and towards more environmentally friendly paper-based packaging, is expected to complete around the end of 2019. Over 80% of all corrugated packaging sold by Smith is sent back to its paper mills for recycling. 

The share price sank by over 4% in early UK stock market trading, offsetting a near 3% price gain the day prior to the results.  

ii view:

DS Smith offers investors the chance to invest in a European and North American paper and packaging company. 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.

For investors, exposure to the German auto sector and volatility in both paper prices and input costs offer some caution. But a prospective dividend yield of over 4% (not guaranteed) and covered twice by earnings offers attraction. So does a forward price/earnings (PE) ratio below the three and 10-year averages. 

Positives: 

• Exposure to e-commerce and environmental trends
• €70 million cost saving programme

Negatives:

• Volume weakness seen in some export-led markets such as Germany
• Group input costs are volatile

The average rating of stock market analysts:

Weak buy