DS Smith wraps up year on a high as ecommerce boom fuels demand
Packaging group’s chief also sees opportunities in traditional bricks and mortar retail
Cardboard packaging might not seem like it requires out of the box thinking. But for DS Smith chief executive Miles Roberts, it is all about the box; the company churned out roughly 1bn of them in the run-up to Christmas.
As Amazon’s sole provider of cardboard boxes in England, as well as one of its major suppliers in Europe, DS Smith is riding the boom in online shopping and its shares have gained roughly 25 per cent in 2017.
Its ascent was signalled by a recent promotion to the FTSE 100 index of blue-chip stocks, joining fellow packaging makers Smurfit Kappa and Mondi, with a stock market valuation of £5.5bn.
Founded by the Smith brothers in London in 1940, DS Smith today employs roughly 27,000 people in 37 countries and is Europe’s leading cardboard recycler, as well as the continent’s second-biggest producer of boxes behind Ireland’s Smurfit Kappa.
Since Mr Roberts became chief executive in 2010, the UK-based group has expanded rapidly with revenues more than doubling, fuelled by a mixture of organic growth and a string of acquisitions in what is a relatively fragmented industry.
This year it entered the US market for the first time, buying 80 per cent of Interstate Resources for $1.14bn.
Although ecommerce makes up just 10 per cent of the group’s £4.8bn annual revenue, this segment is increasing by double-digit percentages each year.
Mr Roberts said the knock-on impact on traditional bricks and mortar retail also presents an opportunity for DS Smith, as stores and consumer good companies seek more sophisticated packaging that attracts customers and easily slides on to shelves without the need for unpacking.
“They’ve got to have better quality packaging in the store to influence the shoppers,” he said. “Instead of just wanting straight brown boxes that they’ve used in the US, they want three, four, five, six colours”.
Thomas Rands, analyst at Investec, reckons DS Smith’s recent US deal will be the “foundation for strong growth” in the country.
“It isn’t as sophisticated as Europe in terms of innovation on corrugated boxes. There’s lots of opportunity to add value,” he said.
Analysts point out, however, that packaging is traditionally a cyclical industry, with earnings sensitive to activity in the wider economy.
A key challenge for DS Smith in the short term is to raise prices, in order to recover rising costs for its main raw material: paper. This squeeze led the company’s underlying operating profit margin to fall 60 basis points to 9 per cent in the half-year ended October 31, even as revenue jumped by almost one-fifth.
Even so, Justin Jordan, analyst at Jefferies, said that like its peers DS Smith is enjoying a “triple tailwind” of increased industrial production, growth in ecommerce and higher consumer spending. In addition, paper-based and plastic packaging are taking market share globally from glass and metal.
“[Mr Roberts] has done a good job of making a pretty mundane industry seem interesting to investors,” he said.