Recycled packaging firm DS Smith (SMDS) reports a 2.2% build in corrugated packaging volumes in the six months to the end of October helping it to a 4% advance to 311p.


The £2.9 billion cap, which makes packaging for the likes of Unilever (ULVR) and Proctor & Gamble (PG:NYSE), tells Shares it is particularly pleased by the increase in volumes which is achieved against a 'very tough' European backdrop. The company posts a 52% year-on-year increase in first half pre-tax profits to £85 million on revenues up 25% to £2.1 billion – slightly ahead of consensus expectations. Earnings per share is up 30% to 11.2p, while the dividend is hiked by a similar quantum to 3.2p.


It continues to benefit from last year's €1.6 billion acquisition of Swedish rival SCA Packaging (something we discussed in more detail back in June) and unsurprisingly communications manager Hugo Fisher says the group continues to look at M&A opportunities. Market share gains also help and are particularly notable in Germany as well as central and eastern Europe.


With €20 million worth of synergies from the SCA deal achieved during the period, margins are up 0.4% to 7.7% despite multiple increases in paper prices. This brings total synergies from the transaction to €60 million. Management expects to achieve the balance of the targeted €120 million over the next 18 months. The group continues to recover input costs with the usual lag of three to four months.


The firm appears to be delivering on medium-term targets with 12.1%  return on capital employed just within the targeted range of 12% to 15%. Operating cash flow represents 139% of operating profit against a cash conversion target of 120%.


In response to today's numbers, Citi analyst Hugo Mills reiterates both his 'buy' advice on the stock and 340p price target. He says: 'results were slightly ahead of expectations, suggesting that upward pressure is building to estimates; that said, the macro recovery and paper price outlook remain uncertain. We expect consensus to remain broadly unchanged.'


His peer at Davy, Barry Dixon is more circumspect and maintains an 'underperform' rating on the stock. He comments: 'DS Smith is rapidly becoming a leading player in the European corrugated market. We remain concerned, however, at the cash investment required for it to achieve its pan-European FMCG (fast moving consumer goods) strategy.'

Issue Date: 05 Dec 2013