ii view: DS Smith in middle of boom for e-commerce packaging

Is the worst now over as this supplier of packaging to Amazon plans a return to the dividend list.

First-half trading update to 31 October

• Corrugated box volumes down 1.5% 

Guidance

• Profit for the period will be lower than H1 2019 due to Covid
• Intending to pay a dividend for this first-half

Chief executive Miles Roberts said:

"I am pleased with the performance of the Group in the first half of the year, in what remains a difficult and uncertain economic environment caused by Covid. We continue to be excited by the underlying drivers of demand for our sustainable corrugated packaging and our leading offerings for FMCG (Fast Moving Consumer Goods) and e-commerce customers, together with our focus on cost efficiency and cash generation, give us confidence in the business going forward ."

ii round-up:

Paper and packaging maker DS Smith (LSE:SMDS) has flagged improved second-quarter profitability given increased packaging volumes and reduced Covid-19 related costs.  

Smith supplies packaging to the likes of Amazon (NASDAQ:AMZN), Unilever (LSE:ULVR) and Nestle (SIX:NESN). It repeated its intention to return to paying a dividend come its December interim results, thanks to the improving earnings trend.

DS Smith shares rose by more than 3% in UK trading, having fallen by over 20% year-to-date. Shares of rival Smurfit Kappa (LSE:SKG) are up by around 6% in 2020.

Expectations for overall financial performance remain unchanged. Profit for the period to the end of October will be lower than the comparative period in 2019 due to the pandemic. 

The loss of profit from the virus in the full year to the end of April was put at £15 million, given increased Covid costs and lower industrial sector volumes such as automotive. All of its factories remained open during the initial lockdowns enabling its food & drink and pharmaceutical customers to continue supplying essential goods.

On a regional basis, positive corrugated box growth reported in September for both Europe and the US had continued, reflecting ongoing market share gains, in particular with its large FMCG and e-commerce customers. 

Management believes the step-change in use of e-commerce is clearly established across its regions, noting “very high” demand from customers for e-commerce packaging heading into the festive season.

First-half results are scheduled for 10 December. 

ii view:

DS Smith offers the chance to invest in a European and North American paper and packaging company. Paper assets are managed to support its packaging operations. Structural growth drivers focus on e-commerce expansion, environmental trends to replace plastic packaging and the requirement for more sophisticated packaging from retailers. Smith previously sold its plastics division. Over 80% of all corrugated packaging sold is sent back to its paper mills for recycling

For investors, a return to profit growth is not expected imminently, while potential for further Covid-related suppression of industrial customer demand remains under renewed lockdowns. But the very worst could now be behind it, what with many governments classifying its operations as critical, initial Covid costs hopefully swallowed, and the pandemic giving an added push to e-commence demand. Add in an expected return to dividend payments, a former key attraction, and investors may begin accumulating holdings for the longer term. 

Positives: 

• Exposure to e-commerce and environmental trends
• Intending to recommence a dividend payment

Negatives:

• Lower first-half profit expected
• Group input costs are volatile

The average rating of stock market analysts:

Strong hold