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Thoughts on DS Smith?

lse:smds

#1

DS Smiths SMDS the cardboard box maker looks fair value at 360p, off from 380p despite pi buyers, a reasonable progressive dividend, and is one of those companies riding on the momentum of online ordering.

So it ticks the boxes ( tee hee ).

What are the negatives?

It has heavy debt and weak net assets, although that might be improved by the sale of its plastics division.

Share price plunged hard in 2018, because … er?

Views on this please, watching as one to add to the income portfolio for its dividend growth prospects.


#2

marktime - hi

I too am interested in income shares so your question interested me to look at SMDS.
I use a company called Stockopedia (costs me £200 per year for UK stocks - more for Europe and USA which I don’t use). I find it excellent and well worth the money if used wisely! Worth checking out as it lists companies under many different investment strategies - including dividends as well as very detailed data on each company which I used for SMDS. I don’t get any commission by the way!
My conclusion is that I personally would keep them on hold and not invest yet but DYOR.
Comes out OK on value as the revenue, operating profit net profit and EPS have consistently been increasing - though the GROWTH in EPS has recently reduced.
The problem, as you say is it’s debt!
Gross gearing (debt to equity) is 97.4% (including the pension deficit)
Net gearing (debt minus cash) is 83.4% (including pension deficit)
There is a measure (Altman z score) that measures financial risk and SMDS scores 1.4 where anything below 1.8 indicates a risk of financial distress / bankruptcy within 2 years! This is one reason why SMDS is on a list of companies to ‘short’ sell. Although it still is on another list for value shares. This is particularly relevant if the economy is hit with a downturn.
It does have 5 major investors (each holding over £50 million) - the largest two Aviva at £96m and Aberdeen Standard at £84m.
If you look at the graph over 1 year it is a series of highs and lows showing obvious volatility. Was 394 in December and 308 in August now heading down again.
As an aside, I’m holding 50% cash now in anticipation of a general market decline (the major stock markets have had a good run but my view,borne out by history), is that it cannot last - and no, I cannot predict the date!
As you say, a sale could improve the debt position so I would keep a ‘watching brief’ (again DYOR), on this share - as I will now do!
Hope this helps and best of luck
JAR
typo edited


#3

Thanks John. I have been reviewing SMDS in the context of its main packaging rivals Mondi MNDI, Smurfit Kappa SKG and Mayr Melnhof MMK (listed in Austria) which seem to be the other sector leaders in Europe.

Alongside distribution and payment services the packaging sector seems one destined to benefit from the ongoing momentum towards online ordering. These four companies have achieved scale and are fighting it out for sector dominance. MNDI perhaps slower to shift away from plastic and closing factories, and has just lost its CEO to MMK or was he pushed, there is a story as yet untold here.

Of these big four SMDS pays the best dividend. The sp hiatus in 2018 was due to a £1B rights issue and £500M borrowing in order to buy Europac. The plan to sell off its plastics division to Olympus Partners announced last March would have yielded £400M+ net proceeds which should have improved the debt position already, for some reason I can’t find an rns to confirm completion of the transaction expected by the end 2019. Curiously Europac seems still to be involved plastic packaging but SMDS have been positive about its integration and synergies (cost savings).

The latest update from SMDS in early December was pretty good, confident about volume growth and record profits in H1 but hints at competitive price pressures in the US, and some analysts think the momentum from online ordering has eased … the dividend keeps advancing though.

In that context it seems a shame to worry too much about the debt, in September SMDS was able to issue a 7-year E600M note at just 0.875%. which is trifling when the business is operating at gross margins of 11%.

Except that it does not disguise the net debt is high, at over 2 x gross earnings, and a few shorters have been increasing their bets against perhaps speculating if the sale of Plastics has hit a snag. An update in the run in to financial year end (reset to 30 April ?) might be coming in early March, not sure the financial calendar is confusing.

Personally I think SMDS is the pick of the bunch, the entry price is all important though because the sp is volatile 310-390p.

SKG reports 5 Feb, MNDI 27 Feb which will provide a sector backdrop.


#4

I started to build a position recently when the price fell to @360p after what i thought were quarterly results, but felt obliged to take 8% profit 10 days later @390p.

I’m watching for another good entry point. That loan at such a low rate was a masterstroke, as was selling off plastic wrapping equipment while they could still get good value for soon tyo be obsolete equipment.


#5

marktime - hi

Debt is never a problem … until you have to repay it! More realistically, leverage can be beneficial - too much debt is a problem.
Agree SMDS has good points and could well be worth an investment at some time and at some entry point. For me not yet!
Good luck m8
JAR
DYOR


#6

Eadwig - hi
Given the recent graph of SMDS your ‘in - out’ tactic is perfect.
Not sure how much the sale will produce. If you, and presumably the world and his wife, know the equipment is soon to be obsolete, it sounds as if the buyer has the upper hand in what is really a ‘fire sale’ by SMDS.
JAR
typo edited


#7

Hi MK, I have been holding some SMDS for several years and they have paid a rising dividend over many years (in 2017 the 7yr divi CAGR was 25% - see 2017 finals presentation slide 14) but divi growth has slackened off slightly recently (21% div cagr 2019 finals slide 16) .
Financial year end is 30th April.
Plastics division was sold for $585M with completion due around now. (The H1 results transcript has the CFO correcting the CEO that completion expected end of Calendar 2019 not Fiscal 19). Link below seems to work - I dont have a subscription!


There is usually a Q3 trading update in early march but sale completion should be announced sooner.
I too have noticed that there are shorters with rising positions so they must know something we dont!
https://www.shorttracker.co.uk/company/GB0008220112/
Perhaps a combination of plastics division sale delay, paper/cardboard pricing with european market slowdown and maybe USA paper plant contribution. Some shorts in Mondi but nothing listed for SKG.
Also, after a large acquisition there are always concerns that value is not created and the company has overpaid. IMHO SMDS have a good track record of integrating acquisitions and achieving the expected synergies.
I will wait to see what happens but would be tempted to buy more if there is a pull back towards 300p.
PS I’d almost given up on the ii discussion boards and havent contributed anything for a while but I may well revive my interest.
SG


#8

Thanks for all your comments. Waiting for a dip under 350p then, ahead of an update in early March … or sooner, the shorters might be seen off depending on what SKG and MNDI have to say.

Structurally paper/card packaging has to be on the up over the next decade, as we turn our back on plastic and online ordering grows.

I wonder what Amazon intends to do … acquire and integrate its own packager, or use its scale and market dominance to bully a good deal from suppliers.


#9

They got £400m as reported in the H1 trading statement. I assume the plant was still perfectly viable for those who aren’t bothered about their ESG profile.

I see another $7Tn in funds is moving under the ESG mantle which takes more than 50% of global assets under management operating by these ‘guidelines’

I think SMDS made a wise move.

I tried to buy on Friday @358p (plus duty) but my order just missed the market close.

This is an interesting comment because some funds have shorted several companies based on their Over-positive ESG profile not being fully realised as yet, and others, including SMDS they have avoided as already having TOO MUCH negativity priced in. Last I saw it was one of the top 3 in the FTSE 100 to be avoided by shorters because of too much weight already placed on this aspect of the business.

As a result there are currently no reportable short positions open on SMDS at Friday’s close. https://shorttracker.co.uk/companies/

SMDS currently has a Yahoo Finance ESG score of 15,5 which is VERY low. E.g RDSB 35.8, BP 34.9, RIO 29.9, GLEN 44.4, TSCO 63.6, IAG 29.3, BARC 31.7, BDEV 10.4, PSN 14

It should be noted that there is no standard way for scoring these values with most funds using their own methodology, which i imagine shall increasingly become an issue in future.

Amazon have been using 100% recycled cardboard packaging for at least 20 years to the best of my knowledge. I don’t know where they get it from. RMG still wrap their parcels in plastic bags.


#10

I see three shorters with 2.90% against SMDS not including unreported small positions.

I suspect they multi source raw cardboard or pre-forms. 1-2 million boxes a day worldwide, not bothered by the ethics but I don’t buy the idea that they don’t cut down trees. When you think about it cardboard is a huge element of their business, a secure supply is something I suspect they devote huge energy to.

I hadn’t thought about RMG, but they don’t fulfil orders like Amazon do they. I wonder who consumes even more cardboard than Amazon … McDonalds, KFC, Ikea?


#11

Oh yes! Thanks for pointing that out. When doing a company search I’m getting a result of zero, something amiss there.

However, 2.9% is still a relatively small overall position.

Amazon have “100% recycled material” on the special boxes they use for delivering books and DVDs (if anyone still buys the latter), or did last time I saw such a thing. I have some stacked away somewhere for re-selling second hand books myself at my flat in Sheffield, I’ll try to remember to double check this when I’m over there next weekend.

Ikea is an interesting one. The size of their packaged stuff must certainly put them in the running. McDonalds have never used much for burgers because they used to use styrofoam instead. I noted recently they now wrap them in paper only and put them in a paper bag. I doubt many of those bags end up being recycled.

Some of their newer product lines (wraps and so on) come in cardboard and of course the soft drink cups alone (with plastic tops and straws) must score heavily against them. I can’t immediately think of a way for them to solve that, let alone an economic way.

They also hand out little plastic wraps of ketchup and the like by the million (at a guess) each day, whereas in the USA if you eat indoors there are dispensers for ketchup saving on wrapping. Last visit to a McD in Poland the same plastic wraps were given out even to those eating on the premises.

I believe those ketchup wraps are produced in a factory in Lincolnshire for the whole of Europe, by the way. I can see that moving out to within the EU if exporting them attracts a tariff in future. Ironically, my understanding is the factory is manned by around 50% EU workers. They could end up doing the same job in Eastern Europe for half the wages.


#12

Bought a tranche @357p after costs this morning.

After applying profits from the previous sale, which I’ve held over in order to build a position, I now have a single tranche holding at an average of @321p. (At this price I estimate a forward yield of approx 5.4%)

I will add a 2nd tranche if it drops further although that will raise my average holding price (or sell if we see a similar rise from this level to near @400p as per my last purchase.


#13

I have put a bid in for a first tranche at 356p but I am not confident it will find a match, there was pretty strong demand late today so we might have seen the last of the bargain price. Fingers crossed.

btw this from 2 years ago says SMDS is a supplier to Amazon, but I suspect not an exclusive one …

"Britain’s leading cardboard box maker has revealed that the rise of internet shopping has helped its sales surge by more than £1billion in just five years.

London-based DS Smith, which produces millions of tons of cardboard and plastic packaging a year, joined the FTSE 100 last week.

Its customers include Amazon, Asos and Next – some of the most successful retailers to have tapped into the online spending revolution."


#14

Tra la!. A first tranche bought in the dip this morning at 355p.


#15

Despite global markets in turmoil over Wuhan Flu, I am hoping SMDS will bounce back well. Amazon results last week said sales were up 21% a growth rate it hopes to sustain, so it must be using shed loads more cardboard. Might even look to add if the sp remains depressed.


#16

Added a second chunk at 343p this morning.


#17

Sector up this morning thanks to positive news from SKG announcing a dividend hike, saying its cardboard business growth was about 4% driven mostly by the Americas. Can SMDS do better than that?


#18

I added some last week, I just realised this morning…

Added a tranche on 27 Jan @344p.

Average holding on two tranches now UP to @334.47p


#19

RMG report a 3% growth in parcels volume over Christmas, a further sign that there has been solid but not spectacular growth in the logistics / fulfilment sector. Very surprised that RMG is sharply off today, not a reaction to business performance but to a renewed threat of a postal strike. The cries of selling off Royal Mail on the cheap at 330p have disappeared now the sp has slipped to 175p. (Actually that looks really cheap to me with business “broadly in line” and a proposed dividend yield of 8.5%.)

How well SMDS captures the opportunities is key, can it compete with its main rivals for share and still turn in good earnings. It is worrying that we still have not had confirmation that the sale of the Plastics division has completed - I wonder if proposed global restrictions on the export of plastics for “recycling” has damaged the deal.

But surely the long view on this business (sector) must be strongly positive.


#20

I dunno, its certainly not positive on RMG. Isn’t the main reason their share price is down that they’ve sold off most of their main assets (land) by now?

Clearly they’re never going to compete with the likes of Fed Ex … I’ve never seen any future for them, I must admit.