UK Edition
Questor: DS Smith may have online packaging all wrapped up but the shares don’t look cheap
You thought you were just wrestling to open another packet that arrived at your door after a moment of weakness shopping online. What you didn’t realise was that you were partaking in a “unique moment of home theatre”, according to DS Smith, the cardboard specialist.
It seems it is not just children who find more enjoyment in the wrapping now. The £6bn company proclaims confidently on its website that with e-commerce on the rise, “packaging is after all an opportunity to extend brand messaging into the home”.
So much for boring boxes. DS Smith’s eponymous founder began to make cartons in London in 1940 but it is Miles Roberts, the current chief executive, who has done more to make what begins as cellulose pulp sexy. The company was propelled into the FTSE 100 at the tail end of last year and now comprises an empire stretching across 37 countries with 27,000 employees.
Part of the excitement has come from the expanding potential of e-commerce, which accounts for 10pc of group sales and continues to grow by more than 10pc a year. It helps to explain the heady 5.2pc growth in corrugated box volumes at the interim stage. That was sharply up from the 3.2pc recorded in the last financial year and about twice the rate of the wider market.
Marks & Spencer and other high street stalwarts may be shutting stores, but DS Smith is enjoying itself boxing up shopping. There should be more opportunities in Europe, where online retail is less well developed than in Britain and the company has an established supply network.
The second catalyst has been the company’s entry into North America through the $920m (£687m) acquisition a year ago of packager Interstate Resources. “Now it’s time to conquer America,” Roberts modestly declared in these pages in December.
He clearly thinks scale matters. Last week his company snapped up the family-owned Corrugated Container Corporation, which has a handful of sites in Tennessee, North Carolina and Virginia. It specialises in “retail-ready” packaging, the sort of boxes that slide on to the supermarket shelf pre-filled with products and DS Smith already makes for Kit Kat king Nestlé among others on this side of the Atlantic.
There is organic activity too. UBS, the bank, points out that the company plans to add two box plants in Europe and two in the US over three years at a total cost of £150m. Payback is expected over five years.
The shares have risen by about 30pc over the past year and by 6pc since half-year results in December, but looked directionless until early April, when they began to climb steadily.
The company’s slogan is “the power of less”, which sounds a bit underwhelming but refers to less waste, cost and complexity, and the fact it is a good corporate citizen by helping clients such as Costa with the recycling of their coffee cup mountains.
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A pre-close trading update earlier this month, before the June 28 full-year numbers, offered some encouraging signs that investors at least might be in line for more.
DS Smith said it continued to make market share gains and would find another $5m of synergies from the integration of Interstate by the end of the third full year of ownership.
Company watchers at Berenberg point out that operating margins have shown continual improvement, rising from 4.6pc in 2010 when Roberts took the helm to 9.2pc last year, but at best will pause from here. Worries centre on DS Smith’s ability to pass on stiff raw material price rises. Berenberg believes costs will be passed on over time but forecasts a £55m shortfall in earnings for the financial year just ended.
The management – including the chairman, Imperial Tobacco alumnus Gareth Davis – has earned itself an impressive reputation for delivery and oozes confidence that it can keep unearthing new innovations to hold it on a superior growth path. Nor will Roberts get distracted, as seen by his comments on stories a few months ago that linked DS Smith to Bemis, a large plastic packaging firm.
However, the shares are trading on 15 times this year’s forecast earnings and look to be up with events. Investors going for growth may be boxed in for now.
Questor says: hold
Ticker: SMDS
Share price at close: 559.6p