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DS Smith’s share price takes flight
Robust full year results have seen DS Smith’s (LON:SMDS) share price recently take flight. An important achievement has also been that the business has earned returns above its cost of capital in 2010/11 serving to create shareholder value. The strategy going forward is to focus on recycled packaging and fast moving consumer goods.
DS Smith estimates that in the financial year to the end of April 2011 its cost of capital was 11%. This is clearly higher than the returns on bank accounts or bonds because businesses are more risky. The group generated a return on average capital employed of 12.7% ensuring that it was able to justify the capital deployed within the group.
This offers stark contrast to last financial year when the return on average cost of capital was 10.1% and underlines that DS Smith has seen a robust turnaround in its financial fortunes. The group is showing that there is money to be made in packaging and there looks to be more to come.
The last financial year (12 months to the end of April 2011) has clearly, then, been eventful. The purchase of packaging group, Otor, has increased the group’s position in fast moving consumer goods in continental Europe. It also came with some patented innovations which DS Smith can roll out elsewhere and looks to be working out financially so far.
Turning to the full year results for DS Smith and the effect of taking over Otor is clear to see. Excluding the deal and revenue rose 10% and adjusted operating profits increased by 20%. However, when Otor is factored in these figures almost double with revenue up 19.5% and adjusted operating profits up 38.7%.
For shareholders the rewards of this profits growth filtered down into adjusted earnings per share rising 36% to 18.9p. DS Smith boosted the dividend by a chunky 41.3% to 6.5p for the year and there looks to be much further to go as it looks to move the dividend cover to 2.0X to 2.5X through the cycle - the cover in 2010/11 was 2.9X.
A key point of note is that DS Smith has managed to overcome rapid cost inflation and is looking to reduce of contract price-review with customers to reduce cyclicality. Costs are also continuing to be attacked across the business and the company is also closing a UK paper mill as part of its efforts to focus elsewhere.
This report was produced by Senior Research Analyst, Andrew Latto.
