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DS Smith - inflation fully offset

Second half trading has been in-line with expectations.

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Second half trading has been in-line with expectations. The group's been able to fully offset rising costs with price increases and volume growth. The impact of rising energy costs has been mitigated by improved efficiency and a hedging strategy.

Full year like-for-like volume growth is expected to be in the mid single-digits, driven by strong demand from consumer goods customers.

The group expects to report net debt of less than 1.9 times cash profits (EBITDA), driven by strong free cash flow.

DS Smith has a minority interest in a Ukrainian business at which operations have been suspended. This part of the company contributed roughly 2% to last year's net profit.

The shares were down 1.3% following the announcement

View the latest DS Smith share price and how to deal

Our View

With the problems caused by the pandemic firmly packed away, our attention has turned to DS Smith's ability to continue growing at the same impressive clip that investors are becoming accustomed to.

Record box volumes at the half year are expected to be complemented by a strong second half despite price increases. This is a function of DS Smith's exposure to two main client groups.

The group is a key supplier to ecommerce groups - providing the cardboard boxes that have become a familiar sight outside houses up and down the country, as we shifted to online shopping during lockdown. 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. Those two groups make up over 80% of DS Smith's business.

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

Crucially, profits have come along for the ride, where we'd been concerned this wouldn't be the case. Costs are an ongoing point of interest where DS Smith's concerned. It makes much of the paper it needs in-house, and wants to cut that even further to around 60%. This means DS Smith gets its raw materials cheaper when paper prices fall in tough times. However, when the industry is booming and paper is more expensive the group's margins get squeezed. With commodity prices on the rise, this goal likely isn't a priority.

Input costs are on the rise, and to cope, DS Smith is increasing its own packaging price. This strategy is offsetting those higher costs. Strong demand despite rising prices suggests the group is relatively well insulated from the current inflationary environment.

The balance sheet's been carrying a little more debt than is ideal, following the acquisition of Europac - a French, Spanish and Portuguese packaging group. But management's expecting net debt to be less than 1.9 times underlying cash profits (EBITDA) at the full year, suggesting progress on this front.

That brings us to the group's dividend, which is back on the table after a Covid-related pause last year. In light of improving trading, the 5.2% prospective dividend looks to be well-covered for now. However this is contingent on price increases continuing to offset rising input costs without denting volumes. This isn't guaranteed in the current climate.

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.

Half Year Results (9 December 2021)

Half year revenue rose 22% to £3.4bn, increased demand for retail and sustainable packaging means volumes reached record levels. There was especially strong growth in the US and Southern Europe. The group's been able to offset rising input costs through lower energy costs and raising prices.

As a result, underlying operating profit rose 26% to £276m.

DS Smith said it's on track to meet its targets for the second half of the year and announced an interim dividend of 4.8p. That's an increase of 20% and in-line with the dividend policy.

Corrugated box volumes rose 9.8% compared to 8.8% last year, on a rolling twelve-month basis, volumes are up 8.8%.

Revenue in Northern Europe rose 20% to £1.3bn, reflecting strong box volumes and price increases. The region also benefitted from higher selling prices of paper and recycled fibre. These benefits, as well as the benefits of scale from the higher volumes, more than offset increased input costs and underlying operating profit rose 30% to £87m.

Similar trends played out in Southern Europe, where better tourism trends in Iberia also helped. Revenue was up 27% to £1.2bn, while underlying operating profit rose 28% to £122m.

Eastern Europe saw revenues rise 26% to £523m, again because of higher volumes. However, underlying operating profit fell 11% to £31m. Largely due to increased paper costs as the region's slower to pass these on to customers in the short term.

Revenue rose 7% to £274m and underlying operating profit rose 64% to £36m in North America.

Free cash flow of £188m was lower than the £207m achieved at the same time last year. Net debt was £1.6bn, down from £1.8bn, and is now equivalent to 1.9 times cash profits.

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
Laura Hoy
Laura Hoy
ESG Analyst

Laura is part of HL's ESG analysis team, working to offer research and analysis to help with sustainable decision making. She also works with other parts of the business to help integrate ESG.

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Article history
Published: 10th March 2022