Overview
DS Smith PLC (SMDS) is a London, United Kingdom-based multinational packaging company. The company deals in plastic packaging worldwide and a leading provider of corrugated packaging, with operations in more than 37 countries. From a box making business established by the Smith family in London in the 1940s, the group over the past 80 years has grown dramatically through a series of acquisitions. In late 1950, the company was listed on the London Stock Exchange. Today, the company's services and areas of expertise has also expanded considerably, with approximately 32,000 people employed by the group. In December 2017, DS Smith was included in the FTSE100 index.

Being a packaging strategist, the group offers its customers with strategic support across their entire packaging Supply Cycle, operating as a unified company with divisions in the paper, plastics, packaging and recycling. The company is also regarded as the industry benchmark in Supply Cycle strategy and packaging. The company has a recycling business that collects corrugated cardboard and used paper, from which corrugated packaging materials are manufactured in the company's manufacturing facilities.

Key Statistics


Management
Gareth Davis is the Chairman of the Board; he was appointed to the position in January 2012. He has previously held various management positions in other companies. Miles Roberts is the Group Chief Executive; he was appointed as the CEO and Executive Director in May 2010. Adrian Marsh is the Group Finance Director; he was appointed in September 2013.

Segments
The company’s packaging business is differentiated in six segments: UK, Western Europe, DCH & Northern Europe, Central Europe & Italy, North America, and Plastics. According to the latest filing, the group generates most of its revenue from Central Europe and Italy, closely followed by Western Europe. Plastic packaging’s products are sold worldwide with manufacturing sites in the US, Europe and the Asia Pacific, while recycling and paper form an integrated part of the company’s global supply chain operations.

Top Shareholders

Source: Thomson Reuters

Recent News
The company's growth in recent time has been, in part, fuelled by a series of strategic initiatives in mainland Europe and the US. On 06 March 2019, the company announced that it had signed an agreement to sell the Plastics division to Olympus Partners, subject to customary regulatory approvals. The sale was made for a total business value of $585 million, and the transaction is expected to be completed in H2 of 2019. The transaction is an essential step towards focusing on its goal of sustainable packaging business. Also, on 22 January 2019, the acquisition of Europac was completed.

Key Financial Highlights (1H FY 2019, in £m)
 
(Source: Company Filings)

The group reported revenue growth (continuing operations excluding plastics) of 16% on a constant currency basis to £3,073m, while revenue, on a reported basis, rose by 15%. The group delivered good growth with a 120 bps increase in return on sales to 9.9%, driven by strong organic volume growth of 3.2%, ahead of its target of GDP+1%. The growth in volume was due to the company's innovative packaging solutions and a strong competitive position. The increase in revenue reflects a recovery in paper prices, volume growth in corrugated boxes, and contribution from acquired businesses. Adjusted operating profit, on constant currency basis, grew by 32% to £304 million, driven by 11% growth in organic business despite headwind from currency translation. The growth was driven by higher volumes and the benefit of higher pricing and sales mix. While adjusted profit before tax was £220 million, against £167 million reported in 1H 2018, reported profit before tax was £162 million versus £128 million in FY 2018, reflecting higher operating profit but was offset by higher interest costs. Profit in 1H 2019 was £130 million against £107 million reported in the corresponding period of last year. While unadjusted earnings per share for continuing operations were 9.5 pence, adjusted EPS, driven by the growth in operating profit, increased by 9% to 16.5 pence. Return on average capital employed at 13.9% remained stable and was still in the upper half of the target range. Net debt at the end of the period was £648 million, representing 0.8x EBITDA, while free cash flow fell to £209 million but proved sufficient to cover dividends. The Board, demonstrating the confidence in the outlook for the group, increased the interim dividend by 14% to 5.2 pence per share.

Financial Ratios

(Source: Thomson Reuters)

Ratios Commentary
The company's EBITDA and operating margins improved marginally in the first half of FY 2019 but were still less than the industry median. However, net margin and ROE of the company were lower than its peers, indicating a room for improvement. The liquidity ratios improved considerably, with a quick ratio now better than the industry and current ratio in line with the industry. This shows that the company has a higher level of liquid assets than its peers. The leverage position improved in 1H FY 2019 and is now largely comparable to the industry. Higher activity ratios indicate a better utilisation of the company's assets.

Valuation Methodology
Method 1: Price/Cash Flow Multiple Approach (NTM)


To compare SMDS with its peers, Price/Cash Flow multiple has been used. The peers are BillerudKorsnas AB(NTM Price/Cash Flow was 5.56), Stora Enso Oyj(NTM Price/Cash Flow was 6.13),Mondi PLC(NTM Price/Cash Flow was 6.64), UPM-Kymmene Oyj(NTM Price/Cash Flow was 8.80), RPC Group PLC(NTM Price/Cash Flow was 11.19) and Weir Group PLC(NTM Price/Cash Flow was 12.82). The mean of Price/Cash Flow (NTM) of the company’s peers was 8.52x (approx.).

Method 2:Price/EarningsMultiple Approach (NTM)
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.

Share Price Commentary
 
Daily Chart as at April-15-19, before the market closed (Source: Thomson Reuters)
 
On April 15, 2019, at the time of writing (before the market closed, at 11:55 am GMT), SMDS shares were trading at GBX 361.60, up by 1.65 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 542.45/GBX 285.83. At the time of writing, the share was trading 33.33 per cent lower than its 52w High and 26.52 per cent higher than its 52w low. Stock's average traded volume for 5 days was 4,747,416.80; 30 days – 5,406,796.90 and 90 days – 5,475,759.71. The average traded volume for 5 days was down by 12.20 per cent as compared to 30 days average traded volume. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 10.3x as compared to the industry median of 13.1x. The company's stock beta was 1.02, reflecting the same directional movement of stock with the index. The outstanding market capitalisation was around £4.87 billion and a dividend yield of 4.22 per cent.
 
Risks Assessment and Growth Prospects
 
During the past six months, the company has made significant progress: the company substantially increased profit levels, it has strong momentum in the market and delivered good top line growth. Through a strong FMCG presence, the company continues to win market share. It has also maintained its leadership position in both sustainable packaging and e-commerce. Further, the proliferation of online market at the expense of brick-and-mortar stores offers an immense opportunity for growth from companies like Amazon, which is already a customer of DS Smith. The company's focus on healthy returns and synergies from acquisitions and value-added packaging, together with sustained operational leverage from one more year of excellent volume growth positions the company well to capitalise on the ongoing growth trends. The company has also recovered from the rising input costs as well. Though the company has expanded its global footprint through a series of acquisitions, the risk of any venture failing has also risen considerably, which is further accentuated with slowing worldwide economic growth, especially in Eurozone which might lead to weaker consumer demand. Brexit related uncertainties can increase the interest costs for the company and has led to the curtailment of expansion plans in its home market. The company is also exposed to significant risks from large volatility in paper demand and supply mechanics.

Conclusion
Strategic acquisitions along with strong organic growthhave considerably improved the company’s financial position which has made the market confident about the prospects of the business. Based on strong financials and supported by valuation done using the above two methods, we have given a BUY recommendation at the closing price of GBX 355.60 (as on 12th April 2019) with high single-digit upside potential based on 8.52x NTM Price/Cash Flow (approx.) on FY19E cash flow per share and 11.90x NTM Price/Earnings Value (approx.) on FY19E earnings per share.
 
*The buy recommendation is valid for the current price as covered in the report (as on April-15-19).

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