Decline in Volumes22 Jun 2023 16:42
HL COMMENT (22 JUNE 2023)
DS Smith reported full-year revenue of £8.2bn, up 11% when ignoring the effects of exchange rates. Higher prices were the key driver of growth, partially offset by a 5.8% decline in volumes as market demand was worse than expected.
Underlying operating profit rose 35% to £861m, driven by the benefit of higher prices which was slightly offset by higher costs and lower volumes.
Free cash flow fell 32% to £354m, impacted by higher capital expenditure. Net debt rose from £1.5bn to £1.6bn on higher capital expenditure, but higher cash profits meant the ratio of net debt to EBITDA improved from 1.6 to 1.3 times.
Trading in the new year is in line with management's expectations, despite box volumes remaining lower than normal.
The Board has proposed a final dividend of 12p, taking the total for the year to 18p - a 20% increase.
The shares were broadly flat in early trading.
Our view
DS Smith's resilience in tough conditions has continued to hold it in good stead. Despite falling sales volumes, it's delivered 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.
The group's a key supplier to e-commerce group, 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 price hikes are now feeding through to the bottom line.
Volumes are another challenge, falling over the year just gone. It's important to note that the decline doesn't look to be related to price hikes, more a result of weaker demand from the end user and a tough market. That's important because pricing is a much bigger contributor to profits than volumes in the box industry.
The picture has started to improve in recent months, and compared to the year just gone we'd expect trends to improve over the year. But with tricky economic conditions, we see this as an ongoing challenge in the short term.
Looking at the balance sheet, the group's very well capitalised. 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 6.3%, which looks well covered currently. Nothing is guaranteed.
DS Smith is in a strong position with exposure to attractive end markets. The valuation sits a good way below the longer-term average, which we feel offers potential upside.
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