ii view: internet boom drives DS Smith box volumes

Exposure to e-commerce, a focus on sustainability and takeover speculation. Buy, sell or hold?

Third-quarter trading update from 1st November

Chief executive Miles Roberts said:

“We are seeing excellent demand from FMCG (Fast Moving Consumer Goods) and e-commerce customers for our sustainable packaging products and solutions and we continue to invest for growth in these areas. Covid-19 is accelerating a number of the structural growth drivers and with our leading position in recycling and fibre-based packaging we are well positioned to capitalise and drive further market share gains.”

ii round-up:

Paper and packaging maker DS Smith (LSE:SMDS) today reported trading which remained in line with its expectations as elevated demand for packaging during the pandemic battled against rising input costs. 

Like-for-like corrugated box volume growth had accelerated, with expected e-commerce strength over Christmas continuing into 2021. 

DS Smith shares rose marginally in UK trading, having risen by around a quarter over the last year and by more than 40% since late October, just prior to announced vaccine development success. 

DS Smith, which was recently subject to takeover speculation from rival Mondi (LSE:MNDI), also flagged some encouraging signs of recovery from its industrial customers. These include the automotive sector in Germany and the surrounding Benelux region.

Northern Europe and North American had seen the most positive performance, given strong growth from its largest customers, and increasing utilisation of its Indiana plant. Smith supplies packaging to the likes of Amazon (NASDAQ:AMZN), Unilever (LSE:ULVR) and Nestle SA (SIX:NESN).

Input costs had, together with higher demand, continued to drive higher paper prices. Management had started to recover these additional costs through higher packaging prices. 

All of Smith’s factories remained open during the initial lockdowns enabling its food and drink and pharmaceutical customers to continue supplying essential goods.

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. Smith previously sold its plastics division. Over 80% of all corrugated packaging sold is sent back to its paper mills for recycling.

For investors, a forecast price/earnings (PE) ratio of around 17 times is currently above both the three and 10-year averages, suggesting the shares are not obviously cheap. But exposure to further growth in e-commerce is difficult to ignore, while the previous sale of its plastics business has boosted its environmental credentials. The return to dividend payments following a halting at the height of the pandemic now sees the shares sat on an estimated income yield in the region of 3%. And speculation regarding a possible bid from rival Mondi is not to be forgotten. A combination totalling around 17% of European containerboard capacity is only just above Smurfit Kappa's (LSE:SKG) 13%. The shares are up significantly over the past few months, but demand for the shares remains.  

Positives: 

• Exposure to e-commerce and environmental trends
• Restarted the dividend payment

Negatives:

• Valuation not obviously cheap
• Group input costs rising

The average rating of stock market analysts:

Strong hold