How is DS Smith progressing towards digital transformation in the packaging industry?

Summary

• DS Smith Plc has reported 10.0% contraction in revenue during H1 FY21.
• E-commerce sales were driven up by 30% during H1 FY21.
• The Company is expecting its capital expenditure to be around £330 million during FY21.

DS Smith Plc (LON:SMDS) is the LSE listed industrial stock. Based on its 1-year performance, shares of SMDS have generated a return of negative 5.54%. Shares of SMDS last traded at GBX 361.30 (as on 11 December 2020).

DS Smith Plc is the FTSE 100 listed company, which is a leading corrugated packaging provider around the globe. The Company has its operations in more than 35 countries and currently employs above 31,000 employees.

Packaging industry overview

The global packaging market is estimated to be around US$1 trillion. The scope of packaging increases with the growing population and rising urbanization as it will increase trading activity and subsequently; the need for packaging will also grow. Paperboard packaging market constitutes around 40% of the packaging industry. The market can be segmented into two broad categories fibre-based packaging and non-fibre-based packaging, which encapsulates packaging making use of paper, glass and metals. The plastic-based packaging controls one-third of the market. Regarding the end usage, the industrial market accounted for 40% of world packaging consumption followed by food packaging market in second place.

Financial Highlights (for six months ended on 31 October 2020 as on 10 December 2020)

(Source: Company result)

• The revenue of the Company declined by 10.0% at constant currency to £2.89 billion for H1 FY21 due to adverse impact of Covid-19 pandemic and the impact of lower box and paper prices.
• The Company has shown resilient volume performance with an overall drop of just 1% during H1 FY21, with October 2020 showing the growth of 3% when compared with the equivalent period of last year.
• On the profitability front, the adjusted operating profit of the Company went down by 35% to £230 million. Similarly, the profit before tax has worsened by 55% to £97 million during H1 FY21.
• The adjusted earning per share has dropped by 38% to 10.8 pence per share during H1 FY21 ended on 31 October 2020.
• With regards to its financial position, the net debt of the Company stood at £2.09 billion during H1 FY21 ended on 31 October 2020, while it was £2.10 billion as of 30 April 2020.
• The free cash flow of the Company has increased by 16% to £207 million as of 31 October 2020.
• Return on Average Capital Employed (ROACE) went down by 300 basis points and stood at 8.7% as of 31 October 2020.
• The Board has declared an interim dividend of 4.0 pence per share to be paid on 04 May 2021 due to strong demand observed in packaging.
• The Covid-19 pandemic has resulted in a change in consumer behaviour, and shopping habits as the e-commerce sales was driven up by 30% during H1 FY21.

Operational Highlights as of 10 December 2020.

• The performance in North America is boosted by the ramping up of greenfield box plant in Indiana. However, the recently announced paper price increase is not considered in H1 FY21 revenues.
• The organic corrugated box volume has reduced by 1.0% during H1 FY21 ended on 31 October 2020, considering a sharp decrease in the first quarter due to Covid-19 lockdowns.
• The revenue across all four geographical segments, North America, Northern Europe, Southern Europe and Eastern Europe, was declined by 10%, 7%, 14% and 5%, respectively, during H1 FY21.
• The Eastern Europe region has a larger exposure to industrial and e-commerce sector than entire Europe, making it as best performed geographic segment for the Company.
• The Southern Europe business segment will continue to benefit from the Europac acquisition and network of fresh acquired box plants.
• The performance of Northern Europe segment is driven by good performance in the UK due to strong presence through e-commerce.

Recent News

On 17 November 2020, the Company has announced regarding the appointment of David Robbie will be joining easyJet Plc as a Non-Executive Director effective same day. 

Share Price Performance Analysis of DS Smith Plc

(Source: Refinitiv, chart created by Kalkine group)

Shares of DS Smith Plc last traded at GBX 361.30 as on 11 December 2020. SMDS’s 52-week High and Low were GBX 397.80 and GBX 244.80, respectively. DS Smith Plc had a market capitalization of around £4.96 billion.

Business Outlook

The Company has shown optimism regarding its scope of growth for corrugated packaging due to several new trends created since the emergence of Covid-19 pandemic. The Company has announced the construction of two art packaging plants in Italy and Poland to meet the elevated demand in FMCG and e-commerce sector. The Company is expecting to meet its financial targets despite all the uncertainty caused by Brexit and Covid-19 pandemic driven by positive momentum set by increasing paper and box prices.

The Company is expecting its capital expenditure of around £330 million due to its construction of packaging plants. The Company will continue to strengthen its US performance with new customer wins already in line with the strategy. The resumption of the payment of the interim dividend further highlights the strength of its financial position.