DS Smith reported first half revenue dip 2%, ignoring currency moves, to £3.4bn. Lower selling prices were only partially offset by a 2% rise in like-for-like volumes. Underlying operating profit fell 38% to £221mn, in line with expectations.
There was a free cash outflow of £69mn, and net debt rose from £2.2bn to £2.5bn over the 6 months.
Over the full year the group expects modest volume growth, with improved packaging prices to recover higher input costs.
Following shareholder approval, the DS Smith and International Paper combination is expected to be completed in the first quarter of 2025.
An interim dividend of 6.2p was announced, up 3%.
The shares fell 1.4% in early trading.
Our view
Packaging giant DS Smith has delivered a decent set of first half results, in line with recently lowered expectations. The paper and packaging market hasn’t been kind, with lower pricing pretty much accounting for all of the profit drop from last year – something that’s largely out of DS Smith’s hands.
We're cautiously optimistic that volumes will continue to improve. There are signs that customers, like Amazon, are back in the market after reducing packaging levels to cope with lower end-consumer demand. There have also been positive moves in the pricing landscape, though benefits usually lag and aren’t expected to land until the second half.
The group's a key supplier of cardboard boxes to the e-commerce and consumer goods sectors, including 'shelf-ready' options for supermarkets. With a longer lens, 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.
Looking at the balance sheet, despite the increase in net debt to 2.8x cash profit, it’s just about at a level we're comfortable with. The recent lack of cash generation is disappointing, but we're hopeful this is a blip rather than a trend, and it’s expected to flip positive over the second half - but something to keep an eye on.
For all the operating chat, deal talks have dominated the news recently, and with Mondi out of the race, DS Smith is looking to press on and merge with the US-based International Paper Company.
Medium-term savings of around £413mn certainly look attractive, significantly higher than what investors had been discussing in the early days of deal speculation. There’s a lot of scope to drive efficiency gains, from integrating plants and sharing technology to using the new combined scale to push for better terms with raw material suppliers. To us, the deal makes a lot of sense.
DS Smith is in a good position with exposure to attractive end markets, and we continue to like the business. The valuation will likely be led by developments with the International Paper deal. In these situations, there’s always added risk, with upside in the short term likely to be limited by the implied deal price.
Environmental, social, and governance risk
The containers & packaging industry is relatively low risk in terms of ESG. Environmental risks are the most acute in this industry, with carbon emissions and resource use being the key drivers due to intensive manufacturing processes. Other concerns include emissions, effluents and waste, and the impact of products on the environment.
According to Sustainalytics, DS Smith’s overall management of material ESG issues is strong.
DS Smith has embraced strong ESG reporting and assigned board-level oversight for these issues. Executive pay is tied to ESG performance targets, though the specifics of these targets are not clearly outlined. It also has a robust environmental policy and a well-established whistleblower program to ensure accountability.
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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