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DS Smith weak as it holds off from reinstating dividend payments as full-year results dip

The balance sheet is robust, the group has offloaded its Plastics division and the medium-term growth drivers are "as strong as ever" but the board does not feel confident enough to resume dividend payments.

DS Smith plc -

DS Smith PLC (LON:SMDS) shares retreated on Thursday as the packaging giant said that although the coronavirus (COVID-19) pandemic has had little impact on its business it is expecting some short-term disruption and is holding off from reinstating dividend payments.

In its results statement covering the full-year to April 30, 2020, the group said it is expecting lower volumes to industrial customers and additional operating costs as a result of the fall-out from the pandemic.

The FTSE 100-listed company posted full-year revenues of £6.04bn, down from £6.17bn the year before, with the pandemic lopping an estimated £15mln off revenues in the final two months of the financial year. Reported profit before tax eased to £437mln from £455mln the previous year, while adjusted profit before tax rose to £368mln from £350mln.

READ: DS Smith cancels dividend payment despite strong trading

Having previously decided not to pay its interim dividend the DS Smith board has decided that the economic outlook is still too uncertain to justify paying a final dividend in respect of the year just ended.

At the same time, the company stressed its balance sheet remains robust, with around £1.4bn undrawn on its banking facilities and no substantial debt refinancing due until 2023.

"We have made good strategic and financial progress in the year, with the disposal of our Plastics division reinforcing our focus on sustainable fibre-based packaging and our strong commercial focus driving record margin,” Miles Roberts, DS Smith’s chief executive said in the results statement.

“Our business model is resilient, built on our consistent FMCG [fast-moving consumer goods] and e-commerce customer base. In the short term, however, the impact of Covid-19 on the economies in which we operate is likely to impact volumes to industrial customers and add to operating costs. In particular, infrastructure constraints have driven elevated OCC [old corrugated cardboard] prices, although we currently expect the impact to be limited to H1 [first half],” he added.

“In the medium-term, the growth drivers of e-commerce and sustainability are as strong as ever. The Covid-19 crisis is also expected to accelerate a number of the structural drivers for corrugated packaging and our scale and innovation-led customer offering positions us well and gives us confidence for the future," Roberts predicted.

In morning trade on Thursday, shares in DS Smith shed 7.7% at 294.20p.

Glum economic outlook is going to sting

Commenting on today's results, Sophie Lund-Yates, equity analyst at Hargreaves Lansdown said: “Coronavirus hasn’t left DS Smith unscathed, but that’s not to say the picture’s entirely gloomy. The packaging giant has significant exposure to fast-moving consumer goods companies, and is an integral part of the machine that keeps goods on our supermarket shelves. That means it’s been offered a level of protection in the current downturn, because a certain amount of demand will show up come rain or shine. Added to that is an increase in online shopping, which hasn’t just acted as a boost now but is a long-term growth lever for the group."

"However, she added, "there’s also an element of industrial exposure, including to the struggling automotive sector. Combined with heavy pressure on paper pricing means revenues aren’t looking all that spritely. The fortunes of companies like DS Smith wax and wane with the wider economy, and that means the glum economic outlook is going to sting. There’s comfortable breathing room on the balance sheet at this moment in time, but the income statement is likely in for a tougher time in the near to medium term."

The equity analyst concluded: "Investors will be disappointed dividends have been put on the back burner, especially as net debt seems to be under control. However the move is a prudent one – protecting cash reserves now will ensure the path back to shareholder returns remains open.”

 -- Adds share price, analyst comment --

Quick facts: DS Smith PLC

Price: 271.1 GBX

LSE:SMDS
Market: LSE
Market Cap: £3.73 billion
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