DS Smith PLC (LSE:SMDS) would probably make the last 16 of a competition for the least sexy FTSE 100 company.
Maybe even the semi-finals, depending on your view of financial companies, although it would have to fight off the claims of sector peers Mondi PLC (LSE:MNDI) and Smurfit Kappa Group plc (LSE:SKG).
The corrugated cardboard packaging specialist’s fortunes are generally tied to global economic activity. Its share price is about where it was at the end of December 2018, despite enjoying a rally in 2020 shortly after the first UK lockdown when online shopping became all the rage.
The lockdown gains have been surrendered since last September when the whole sector lost favour as investors worried about the rising cost of paper.
Russia’s invasion of Ukraine also did the share price no favours, as the company has a minority investment in a Ukrainian business, RKTK; in today’s full-year results statement the company wrote off its £29mln investment in RKTK, saying the invasion had caused significant damage to the Ukrainian company’s assets and affected its ability to trade.
Aside from that, it was a generally reassuring results statement from the company, with a 5.4% increase in like-for-like corrugated box volumes from the previous year, thanks to continued growth in the resilient fast-moving consumer goods (FMCG) and other consumer-related sectors, which represent over 80% of the company’s volumes, plus a recovery in the industrial sector following the impact of the pandemic in the prior year.
Regionally, it saw “particularly good performances” in the US, Southern and Eastern Europe.
The company spoke of numerous structural market drivers, including plastic replacement.
The force definitely seems to be with the company in this area; for instance, the Scottish government recently banned items such as cups, lids and takeaway containers made from expanded polystyrene in online and in-store sales, while in Canada the federal government is banning companies from importing or making plastic bags and takeaway containers by the end of this year, and outlawing their sale by the end of 2023.
Meanwhile, the unstoppable rise of e-commerce continues to play well to the company’s strengths.
The group anticipates corrugated box volume growth of 2-4% in the current year, with price increases and cost management offsetting inflationary costs.
“DS Smith saw demand for the cardboard boxes it makes continue with strength even though the group passed input cost inflation on to consumers. This is the benefit of DS Smith’s business—from the Amazon boxes lining the streets to the brightly coloured packages lining supermarket shelves, the group has an endless pool of consumers. At some point rising prices will eventually hit volumes, but given packaging is only a fraction of overall shipping costs, that’s still a long way away,” suggested Laura Hoy, an equity analyst at Hargreaves Lansdown.
“DS Smith used the pandemic as a springboard and it is impressive how far it has come. The group’s using some of the excess cash running through the business to fund expansion, while the rest goes toward paying down debt and rewarding shareholders. For now, it looks like the group’s got the balance right.
“The only question mark is whether demand will hold up moving forward. DS Smith’s customers won’t need more boxes if existing ones remain on the shelves, and e-commerce could start to slow as people rein in their spending. With the cost of living squeeze looming large in the background, this isn’t out of the question but with a finger in several different industries, DS Smith is well placed to cope with this,” Hoy suggested.
Prior to today’s results, seven brokers rated the stock a ‘buy’, four said it would ‘outperform’ and one predicted it would underperform, with the other three brokers who cover the stock sitting on the fence.
The shares rose 3.3% to 291.5p on the results, lifting the company to 92nd in the league table of FTSE 100 companies by market capitalisation, giving it a bit of a cushion in terms of avoiding relegation from the index in the next quarterly reshuffle.
The median target price of 437p suggests there is plenty of potential upside.