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DS Smith - dividend held after tough first half, CEO to retire

DS Smith has reported an 18% fall in revenue to £3.5bn.

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DS Smith has reported an 18% fall in revenue to £3.5bn. Volumes dropped by 4.7% but most of the revenue decrease was down to price cutting.

Underlying operating profit fell 12% to £365mn, as lower input costs and efficiency gains partly offset the decline in revenue.

Free cash outflow was £54mn, down from an inflow of £494mn last year. This was due to lower profits, unhelpful timing of cash receipts and payments, and a £103mn final payment for a previous acquisition. Net debt rose from £1.6bn to £2bn since the year-end.

The dividend was held flat at 6p per share.

Management expects markets to remain challenging but that volumes will be stronger in the second half.

It was also announced that CEO, Miles Roberts, will be retiring after 13 years in the role. His formal notice period will not start until December next year.

The shares fell 1.7% in early trading.

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Our view

Selling cardboard boxes might not be the most exciting business model in the world, but DS Smith's resilience in tough conditions has allowed it to mitigate some of the macro-economic headwinds currently faced by its customer base.

The group's a key supplier to e-commerce 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. Looking further ahead, demand for these segments is benefitting from structural growth drivers - consumers are keen to shift away from plastic packaging, and reliance on e-commerce is a trend that's here to stay.

The global economy isn't exactly firing on all cylinders though which is causing a dent in volumes. While this will need monitoring, it isn't all bad news. Input costs have fallen following a period of prolonged upwards pressure. The group's robust approach to pricing means that while it has passed on some of this benefit to customers, it hasn't been at the expense of operating margins.

We're cautiously optimistic that volumes will rebound in the second half of the year. There are early signs that customers, think Amazon, are back in the market after reducing packaging levels last year to cope with lower levels of end-consumer demand. We should also start to see easier comparable periods acting as a tailwind.

Looking at the balance sheet, despite the recent increase in net debt levels, 1.7x cash profits is still a level we're comfortable with. The lack of cash generation seen in the first half was disappointing but we're hopeful that this was a blip rather than a trend. It's something to keep an eye on though.' There's probably scope for a buyback or bolt-on acquisitions, but the focus is organic growth and efficiency improvements - which makes sense. The forward prospective yield sits at an attractive 5.9%, which looks well covered for now. As always there can be no guarantees.

DS Smith is in a strong position with exposure to attractive end markets. The valuation currently sits a good way below the longer-term average, which we feel offers potential upside. But remember, this also reflects ongoing economic uncertainty so be prepared for further ups and downs.

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
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 7th December 2023