DS Smith now expects half year operating profit of at least £400m, and progress across all of its key financial ratios. Because of this, the group now expects overall performance for the full financial year to be better than previously thought.
This comes as "very strong" revenue growth and cost savings have more than offset the effect of lower like-for-like corrugated box volumes.
The shares rose 12.6% following the announcement.
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Our View
DS Smith's resilience in tough conditions is remarkable. 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 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 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.
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 while deploying contracts to protect against unfavourable gas prices. This strategy is currently helping offset those rising costs. Higher packaging prices haven't upset demand too much so far, insulating the group from inflationary headwinds. However, while this trend has continued for longer than we'd feared, we can't rule out a slowdown if economic conditions sour sharply.
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 more manageable levels. The balance sheet looks in good shape for now, but softening demand could change that as costs continue to rise.
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 7.0% prospective dividend looks to be well-covered. However, this is contingent on price increases continuing to offset rising input costs without denting volumes further. This isn't guaranteed.
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.
First Quarter Trading (6 September 2022)
First quarter trading has been in-line with expectations. Box volumes declined slightly on a like-for-like basis, but are still expected to grow 2% for the full year.
Nearly all input costs, including energy, have increased significantly, but improved efficiency and the long term hedging programme have "substantially" mitigated this. The group remains 90% hedged against the price of natural gas for 2023 and roughly 80% hedged for the year after.
Cost efficiencies and successful increases in packaging prices have boosted profitability and cash generation. At the same time, the group's mindful of economic uncertainty and is seeing some weakness in its Industrial customers, which is currently being offset by its exposure to fast moving consumer goods (FMCG).
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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