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DS Smith - H1 revenue and profit growth, guidance improved

DS Smith has reported first half revenue of £4.3bn, ignoring the effect of exchange rates that's 26% higher than...

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DS Smith has reported first half revenue of £4.3bn, ignoring the effect of exchange rates that's 26% higher than last year. That was driven by higher selling prices, which more than offset a 3% drop in volumes as the market was a little weaker than expected.

Underlying operating profit rose 49%, ignoring the effect of exchange rates, to £418m. That was driven by higher revenue, which offset a 26% rise in operating costs as inflationary price rises, supply chain issues and general availability all weighed.

Free cash flow increased from £188m to £494m, driven by improved profitability. That helped net debt fall from £1.5bn at the start of the period, to £1.1bn.

Management warned the outlook remains challenging but expects second half performance to be in with the first. That would put full year performance ahead of previous expectations.

An interim dividend of 6.0p has been announced, an increase of 25%.

The shares rose 1.7% following the announcement.

View the latest DS Smith share price and how to deal

Our View

DS Smith's resilience in tough conditions is commendable. There aren't many companies in today's climate posting profit upgrades. There are some DS Smith-specific reasons they've been able to pull this out the bag so far.

The group's a key supplier to ecommerce groups - providing the cardboard boxes that are a familiar sight outside houses up and down the country. DS Smith also sells its boxes to consumer goods and food groups. These include many of the ''shelf-ready'' cardboard boxes you'll find in the supermarkets.

Demand in these segments has been resilient - consumers are keen to shift away from plastic packaging and reliance on e-commerce is a trend that's here to stay.

Input costs are on the rise, and to cope, DS Smith is increasing its own packaging price while deploying contracts to protect against unfavourable gas prices. It's working, and higher costs are being offset by revenue growth.

Higher packaging prices haven't upset demand too much either. It's true, there was a volume decline over the first half and there are pockets of the market that look weaker than others. The UK and Germany are of particular note, where weaker economic conditions have softened the market. Nonetheless, management remain confident volumes will improve over the second half - time will tell.

We're pleased to see the group's used some of the cash flowing through the business to lower net debt, bringing it back down to a very healthy level of 1 times cash profit (EBITDA). That helps support the dividend, which is back on the table after a Covid-related pause last year.

Improved trading and cash flow means that dividend, which has a 5.5% prospective yield, looks to be well-covered currently. Though, that's reliant on price increases continuing to offset rising input costs, without denting volumes further and there's no guarantees.

Overall, we think DS Smith is in a strong position with exposure to attractive end markets. We don't think those strengths are necessarily reflected in the current valuation. But remember, this also reflects the ongoing uncertainty.

DS Smith key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 8th December 2022