Recovery could be on the cards for DS Smith
DS SMITH is a major cardboard box maker.
That doesn’t sound particularly exciting, but boring companies can sometimes make for thrilling investments.
DS Smith is a cyclical business, meaning its fortunes wax and wane with the wider economy.
For obvious reasons, 2020 hasn’t been kind to the group, but we do also expect it to recover soon.
Having said that, DS Smith’s weathered the current crisis surprisingly well, and that’s thanks to exposure to two key client groups.
The group is a key supplier to e- commerce groups – providing the cardboard boxes that have become a familiar sight outside houses up and down the country as we shifted to online shopping during lockdown.
DS Smith sells around 72 per cent of its boxes to consumer goods and food groups. These include many of the “shelf- ready” cardboard boxes you’ll find in the supermarket.
But despite those tailwinds, the group hasn’t escaped the current crisis unscathed. Disruption to industrial and hospitality customers has hit volumes, and some costs have risen, but falling prices have been the real headache.
Profit before tax fell 55 per cent in the six months to the end of October.
Given the uncertainty ahead it’s good to hear dividends are returning. The shares currently offer a prospective yield of 3.8 per cent.
We continue to think the group’s longer- term prospects are intact, too. E- commerce and consumer goods exposure should remain long- term positives.
Consumers’ growing dislike of plastic packaging should also increase demand over time.
The balance sheet is carrying a little more debt than ideal after buying Europac, a French, Spanish and Portuguese packaging group. But, overall, DS Smith has exposure to attractive markets and sells a product that’s ever more essential.
“This article is designed for investors who make their own decisions without advice. If unsure whether an investment is right for you, you should seek advice. Shares can rise and fall in value so you could get back less than you invest.”