ii view: short-term pain, long-term gain for DS Smith

Despite dividend caution, long-term growth prospects remain in place at this supplier to Amazon. 

Full-year results to 30 April 2020

• Revenue down 2% to £6 billion
• Adjusted operating profit up 5% to £660 million
• Net debt down 8% to £2.1 billion
• No final dividend payment

Chief executive Miles Roberts said:

" We have made good strategic and financial progress in the year, with the disposal of our Plastics division reinforcing our focus on sustainable fibre-based packaging and our strong commercial focus driving record margin. Of course, the year ended with the onset of the Covid-19 pandemic and I am extremely proud of our employees and their tremendous support, working with our suppliers and communities to ensure every factory has remained open throughout the pandemic, delivering essential supplies with outstanding levels of service in this extraordinary time .

“Our business model is resilient, built on our consistent FMCG (Fast Moving Consumer Goods) and e-commerce customer base. In the short term, however, the impact of Covid-19 on the economies in which we operate is likely to impact volumes to industrial customers and add to operating costs. 

“In the medium-term, the growth drivers of e-commerce and sustainability are as strong as ever. The Covid-19 crisis is also expected to accelerate a number of the structural drivers for corrugated packaging and our scale and innovation led customer offering positions us well and gives us confidence for the future."

ii round-up:

Paper and packaging giant DS Smith (LSE:SMDS) decided that it was still too early to resume dividend payments given the backdrop of the Covid-19 pandemic. 

The group, which supplies packaging to the likes of Unilever (LSE:ULVR), Nestle (SIX:NESN) and Amazon (NASDAQ:AMZN), also previously cancelled payment of its half-year dividend in April.

DS Smith shares fell by more than 8% in early UK trading, having fallen by over 20% year-to-date. Shares of rival Smurfit Kappa (LSE:SKG) are down by around 12% in 2020.

Adjusted profit for the year rose by 5% to £660 million with the loss of profit from the pandemic put at £15 million due to increased costs and lower industrial sector volumes. 

All of its factories remained open during the crisis, enabling its food & drink and pharmaceutical customers to continue supplying essential goods. Many governments classified DS Smith’s operations as critical. 

To help battle the impact of the virus, along with suspending the dividend to conserve cash, it has also reduced capital expenditure by 20% and deferred all non-essential expenditure. It has banking facilities headroom of £1.4 billion and no substantial debt refinancing due until 2023.

Earlier this year, the company sold its plastics division given a move by customers towards more environmentally friendly paper-based packaging. Over 80% of all corrugated packaging sold by the company is sent back to its paper mills for recycling.

ii view:

DS Smith offers 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. The corona crisis and lockdown measures taken to battle it have further amplified the significance of e-commence trends.

For investors, ongoing caution regarding the dividend, while arguably sensible, removes a key attraction. Net debt of over £2 billion and exposure to vulnerable industrial customers such as automotive makers must also be remembered. But exposure to both e-commerce and environmental trends look to be long-term positives, boosted by the company’s geographic diversity. In all, current weakness may represent an opportunity for long-term investors. 

Positives: 

• Exposure to e-commerce and environmental trends
• Net debt reduced by the sale of its plastics business

Negatives:

• Dividend attraction removed
• Group input costs are volatile

The average rating of stock market analysts:

Strong hold