DS Smith has reported flat like-for-like volumes in corrugated boxes in the third-quarter. Growth in North America and Eastern Europe was offset by weaker performance in Northern Europe.
Focus remains on improving operating efficiency and managing anticipated raw material price increases. Volumes are expected to grow moving forward, but the market remains challenging.
There was no update on the ongoing potential merger with Mondi.
The shares remained flat in early trading.
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DS Smith's shares jumped last month on news of a preliminary takeover bid from rival Mondi. The potential combination has attractive qualities for both companies. Reports suggest Mondi has sweetened its bid, but a formal proposal is still pending. Mondi faces a 7th March deadline under UK takeover rules to formalise an offer.
Investors should continue to focus on the business fundamentals. On that front, 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 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.
Input costs have been falling, but the latest trading update warns container board prices may be nudging back up. While this will need monitoring, it isn't all bad news. The group's robust approach to pricing means that it expects to pass on costs to customers, so operating margins shouldn’t be affected.
We're cautiously optimistic that volumes will continue to improve in the fourth-quarter. 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’re also starting to see easier comparable periods acting as a tailwind.
Looking at the balance sheet, despite the increase in net debt levels, 1.7 x 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 5.7%, which looks well covered for now. As always there can be no guarantees.
DS Smith is in a good 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, based on previous day’s closing values. 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.
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