MIDAS SHARE TIPS: As we all try to be greener in our everyday lives, pioneering packaging companies such as DS Smith are cashing in
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.
Boxing clever: Cardboard packaging firm DS Smith is cashing in as shops ditch plastic
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 card board 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.
Midas verdict: More and more of what we buy from supermarkets is plastic-free, whether it is Carte D’Or ice-cream tubs or Carlsberg’s new fibre-based beer bottles.
That’s good news for businesses like DS Smith, as the recent update shows. The only question is how far food businesses are willing to take this trend, and how much they, and consumers, are willing to pay for innovative packaging.
And, to put it bluntly, in a recession we buy less stuff, so there’s less need for the packaging to put round that stuff – so DS Smith will suffer.
But there’s much to be excited about in the group’s trading update, which led to analysts upgrading the stock by 10 per cent in terms of profits.
Despite strong figures and good prospects, though, DS Smith is still failing to excite the market. The shares are down nearly a third since January, and although the unexpectedly positive update lifted them slightly earlier in the week, they are still far lower than in recent years.
As the dust settles, and investors once again sort the riskier companies from their less risky counterparts, the company may find itself in favour once again. The shares are now very cheap on some measures, as they trade on just seven times forward earnings and yield 5.5 per cent. It’s worth boxing clever and picking up a few.
Traded on: Main market Ticker: SMDS Contact: dssmith.com or 020 7756 1800