DS Smith PLC (SMDS) is a London, United Kingdom-based multinational packaging company. The group involves in plastic packaging internationally and a top provider of corrugated packaging. 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’s packaging business is differentiated in six segments: UK, Western Europe, DCH & Northern Europe, Central Europe & Italy, North America, and Plastics.

Trading Update as on 6^th March 2019
DS Smith has announced the sale of its plastics division for $585 million (approximately £450 million) to Olympus Partners for an attractive 9.9x implied EV/EBITDA, with the transaction is expected to close in 2H of the calendar year 2019. Net cash proceeds after tax and expenses are expected to be approximately £400 million. Trading since November 2018 has continued to be stronger, in-line with expectation”. SMDS continued to gain share, driven by e-commerce and FMCG weighted customer base, with the Christmas period being particularly busy for e-commerce. The Europac acquisition completed on 22^nd January 2019 and SMDS was pleased with the initial progress on the integration.

Financial Highlights (H1 FY2019, £million)

(Source: Interim Presentation, Company Website)

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 increase in revenue reflects a recovery in paper prices, volume growth in corrugated boxes, and contribution from acquired businesses. Adjusted operating profit, on a constant currency basis, grew by 32% to £304 million, driven by 11% growth in organic business despite headwind from currency translation. In H1 FY19, the adjusted profit before tax was £220 million, against £167 million reported in 1H FY2018. Reported profit before tax was £162 million versus £128 million in H1 FY18, reflecting a 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 statutory earnings per share (continuing operations) were 9.5 pence, adjusted EPS, driven by the strong growth in operating profit, surged by 9% to 16.5 pence. Return on average capital employed stood at 13.9% and remained stable and was still in the upper half of the target range. Net debt at the end of the period (Oct-31-18) was £648 million 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 and increased the interim dividend by 14% to 5.2 pence per share.

Share Price Performance

Daily Chart as at April-23-19, before the market closed (Source: Thomson Reuters) 

On 23^rd April 2019, at the time of writing (before the market close, GMT 12:05 PM), SMDS shares were trading at GBX 356.64, up by 0.095 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 542.45/GBX 285.83. The company’s stock beta was 1.02, reflecting same directional movement of the stock as compared to the benchmark index.

Recent News
On 6^th March 2019, Liqui-Box Corp, a unit of Olympus Partners LP, agreed to acquire plastics division of DS Smith PLC (DS), a Chicago-based manufacturer of packaging products, for an estimated value of USD 585 million.

Key Risks
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.

Valuation Methodology

*All forecasted figures and Peer information have been taken from Thomson Reuters.

Conclusion
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. Strategic acquisitions along with strong organic growth have considerably improved the company’s financial position which has made the market confident about the prospects of the business. Based on the strong growth prospects and the valuation done using the above method, we have given a “BUY” recommendation at the closing price of GBX 356.30 (as on 18^th April 2019) with single-digit upside potential based on 11.24x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.).
 
*The buy recommendation is valid for the current price as covered in the report (as on April-23-19).

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