DS Smith issued a full-year trading statement and described "strong growth in profitability and financial performance". Underlying EBITA (earnings before interest, tax, and amortization) is expected in the £850-£860m range, which would represent a big jump on the £616m generated the prior year.
Cost management and broader performance have more than offset weaker-than-expected volumes. Free cash flow has been described as "strong", meaning a drop in net debt to EBITDA ratio to 1.3 times from 1.6 times in April 2022.
The shares were broadly flat in early trading.
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Our view
DS Smith's resilience in tough conditions has continued to hold it in good stead. Despite falling sales volumes, it remains on track for a second consecutive year of impressive double-digit profit growth. 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 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.
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.
We believe that lower unit sales have been largely driven by weak demand for DS Smiths customers' products, rather than the increased prices of cardboard boxes. The company is doing a great job of navigating these challenges. But management's earlier confidence about a second half recovery in volumes so far seems unfounded. At the moment, lower volumes are being more than offset by strong pricing and a tight watch over costs.
But you can't fight a rising tide forever. If volumes continue to fall in the short-term, there are likely to be some bumps ahead.
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 1.3 times cash profit (EBITDA). That helps support dividends, which were increased by 25% at the half-way point of the financial year just ended.
Improved trading and cash flow means that the full year dividend, which has a 5.9% prospective yield, looks to be well-covered currently. Though, that's reliant on trading holding firm 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.
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