Reap profits by the punnet as shops go green
AS WE all try to be greener in our everyday lives, pioneering packaging companies such as DS Smith are cashing in.
The firm is helping businesses to replace plastic packaging with more eco-friendly cardboard and aims for all its products to be recycled or reused by 2030.
So, when you notice that your fruit now comes in a cardboard punnet, rather than a plastic one, or that your minced beef now has a recycled container, you may have DS Smith to thank.
Despite inflation pushing up the price of raw materials, DS Smith’s unscheduled trading update this week was a rare bright spot. The company said that performance is ahead of expectations and Miles Roberts, the chief executive, may be the only person in Britain to ‘look forward to the remainder of the year with confidence’.
Roberts may be a box-half-full kind of a chap, but perhaps investors should be taking his lead. There are a lot of positives in this business, particularly in times like these.
Analysts point out that half of DS Smith’s customers have index-linked contracts, which helps to insulate the business against inflation, while the company has good cost control.
It has hedged 90 per cent of its energy for 2023 and 80 per cent for 2024, which helps with certainty. It has also used some of its cash to lower its debt pile – sensible in the current climate.
Dividend hunters will like DS Smith too. The company already has a sizeable yield, having reinstated its pay outs over Covid. That could rise even further if the company continues to throw off cash.
There are some clouds on DS Smith’s horizon. The company has already noted lower like-for-like corrugated box volumes, and of course in the face of a severe recession, many of us may moderate our online buying habits – bad news for a cardboard box provider. Then there’s the possibility of even greater inflationary pressures in terms of input costs, which could continue to have an impact on the firm’s profitability.
So far, its clients have borne increased costs, but there’s a limit to how much they can take.
DS Smith’s margins are already thin, and so rising paper pulp prices will have an impact, it is just a matter of how much.