Saturday 24 August 2019

Share Watch: DS Smith may have the right package for a future return


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John Lynch

Working on this morning's piece, I was investigating the investment potential of the British packaging giant DS Smith when I realised afresh the extraordinary impact the Jefferson Smurfit Group had on Irish share punters more than half a century ago.

It just wasn't possible after Smurfit became a major international player in the 1970s to be a serious Irish investor without having an encyclopaedic knowledge of packaging and the ups and downs of the international price of liner board.

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It is credit to Michael Smurfit, the late Howard Kilroy and outstanding managers like Paddy Wright and Gary McGann that the group has such a lively impact on the investment scene here. If I am unashamedly sentimental about Smurfits (because it was the first share I ever bought), I can be a bit more detached about DS Smith and its current travails.

Like the Irish group, DS Smith has been around since the 1940s but its box-making skill went back even further. Today the company employs 32,000 people, operates in 37 countries and is valued by the market at £4.8bn (€5.3bn) - Smurfit is £6bn (€6.7bn). In the late 1950s it was listed on the London Stock Exchange and a little over a year ago became a constituent of the FTSE 100 index.

Last year the UK packaging industry was indulging in one of its periodic bouts of consolidation. One of DS Smith's rivals, RPC, was bought out by US operator Berry but not before criticism from some institutional shareholders who felt the bid price was too low.

Our own Smurfit Kappa rebuffed an offer from the US International Paper Group. Punters wonder if International Paper will come back again or that others may be putting Smurfit under the microscope. While all this consolidation activity was going on, Smith's share price was pulped.

The company, aware of the increasing regulation of plastic usage, offloaded its plastics business, focusing on fibre (paper based) packaging usually made from waste paper or wood pulp.

The sale will help offset some of the debt the group has built up, reassuring investors who feared the group had taken on too much borrowing. This was due to its acquisition spree, swallowing up companies like Sweden's SCA packaging, US Interstate Resources which will open opportunities across the pond, and a Spanish rival Europac for £1.5bn (€1.67bn).

The UK accounts for only 10pc of the group's business and it is curbing any UK expansion due to Brexit uncertainty.

Despite the overhang of Brexit, DS Smith's UK divisions delivered growth and restructuring initiatives. Its western Europe operations saw pressure on margins and organic growth was flat, however it hopes Europac will give it impetus for growth and margins.

Central Europe (which includes Italy) continues to have good results but in northern Europe the German market was challenging. The group is pleased with its US market results and feels it has opportunities for growth given some of its European customers have US operations like Nestlé, L'Oréal and Reckitt Benckiser.

DS Smith saw revenue increase to £6bn (€6.67bn) with profit before tax of £350m (€389m).

While the group has pursued a careful acquisition strategy for medium and long-term growth, in the short term its share price has fallen from a yearly high of £5.40 to £3.50 a share.

Smith has considerable opportunity to replace plastic and while the company's credit rating is investment grade with a stable outlook, its investors are concerned about its ability to match sustainability with returns.

Perhaps one day I'll get the same charge out of DS Smith shares (if I buy them) as I did out of the Jefferson Smurfit stock, way back when the Beatles were in their heyday.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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