Packaging company DS Smith (SMDS) has reported a 21% jump in full year adjusted pre-tax profit to £473m with the figures bolstered by acquisitions and recovering paper prices.
These figures do however strip out a slew of implied one-off costs relating to acquisitions and restructuring. It also adds back £93m of amortisation non-cash charges.
Including all of these costs puts pre-tax profit at £292m, about 11% higher versus the previous year’s £264m figure.
They are in line with analyst forecasts, so why are its shares marginally down on the news? Read on to discover why.
PICKS & SHOVELS-TO-INTERNET SHOPPING
DS Smith provides the corrugated cardboard packaging that protects the books, CDs, clothes and thousands of other products bought online. Customers include many of the biggest names in internet shopping, such as ASOS (ASC:AIM), Next (NXT) and US giant Amazon.
‘This is a solid set of results from DS Smith, reflecting ongoing strong growth in corrugated demand and pricing recovery,’ say analysts at stockbroker Davy.
They prefer to focus on operating profit figures that exclude adjustments of £530m, or £517m if we adjust for currency movement through the year. This was ‘marginally ahead of our (and consensus) £526m forecast,’ says Davy.
MINOR WORRIES
There are three reasons why the shares are down 0.1% to 563.2p.
First, investors may be a little concerned about margin pressure. Given the rough 20% increase in revenue to £5.77bn, this implies a 10 basis point decline in the operating margin, according to the broker’s calculations. Much that is likely due to price recovery lagging in its European operations.
Another sore point for investors may be debt. Net debt came in at £1.68bn or about 2.4-times earnings before interest, tax, depreciation and amortisation (EBITDA) which is the figure typically looked at by lenders. That’s about £60m higher than Davy’s forecast and beyond the company’s two-times target following a busy spell of acquisition activity.
This is not a big worry as it stands but it does mean that DS Smith has work to do to make sure net debt doesn’t become a more significant problem.
A final point to be made is the strong run of the share price. Since early April the stock has rallied more than 20%, inflating the forward price-to-earnings multiple beyond 19-times.
Many investors will view that as a fairly rich rating for what is traditionally a cyclical business promising a decent 3.1% income yield.
