DS Smith rides Covid recovery wave to 26% revenue growth, passes inflation onto customers

DS Smith shares were up 0.3% to 1,467p in early morning trading on Tuesday after the group reported a 26% increase in revenue to £7.2 billion in FY 2022 as a result of corrugated box volume growth and higher selling prices across the firm.

The company announced an adjusted operating profit rise of 29% to £616 million, with its price recovery serving to offset increased input costs, along with a pre-tax profit leap of 71% to £378 million compared to the last year driven by higher operating profits and a reduction in financing costs.

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Smith highlighted a return on sales uptick of 0.1% to 8.5%, falling below its target of 10% to 12% as a result of significant cost inflation limiting annual performance.

The firm delivered a ROACE growth of 2.6% to 10.8% year-on-year, which fell within its target of 12% to 15% within HY2 with a climb to 12.1% on the back of improving returns from recent investments and acquisitions, including its acquisition of Europac in 2019, alongside a higher operating profit.

“We have delivered strong operational, environmental and financial results. The actions we have taken, driven by our strategic focus on our customers and their changing needs, including an ever-increasing focus on sustainability, have resulted in record volume growth,” said DS Smith CEO Miles Roberts.

“This, together with price increases which have offset significant cost inflation, has driven a strong improvement in profitability and high cash generation.”

“We continued to recycle capital out of mature, non-core assets with the disposal of the De Hoop paper mill, whilst reinvesting in new packaging sites that meet customer demand and offer attractive financial returns.”

Smith confirmed an estimated continued recovery in price and cost management to offset inflationary costs, and noted strong early momentum in FY 2023.

The group mentioned it expected corrugated box volume rise in the range of 2% to 4% and a capital expenditure rise to approximately £500 million in customer-led growth opportunities at attractive financial returns.

“The new financial year has started well, building on the momentum from the previous year. Whilst there remains considerable uncertainty about the overall economic environment, our expectations remain unchanged,” said Roberts.

“Strong customer demand reinforces our confidence to invest in the business, with capital expenditure expected to further increase in the current year. We currently expect to see 2-4 per cent growth in our volumes, aided by our focus on resilient end markets, a strong performance in the US and the opening of new sites in regions where demand is buoyant.”

“This growth, combined with the benefits of ongoing pricing momentum and careful management of our cost base gives us confidence for the year ahead and is expected to result in a further substantial improvement in our performance.”

However, analysts warned to keep an eye on Smith’s financials as the cost of living crisis continued to bite.

“DS Smith saw demand for the cardboard boxes it makes continue with strength even though the group passed input cost inflation on to consumers. This is the benefit of DS Smith’s business—from the Amazon boxes lining the streets to the brightly coloured packages lining supermarket shelves, the group has an endless pool of consumers,” said Hargreaves Lansdown equity analyst Laura Hoy.

“The only question mark is whether demand will hold up moving forward. DS Smith’s customers won’t need more boxes if existing ones remain on the shelves, and ecommerce could start to slow  as people rein in their spending.”

“With the cost of living squeeze looming large in the background, this isn’t out of the question. But with a finger in several different industries, DS Smith is well placed to cope with this.”

Smith noted an adjusted EPS climb of 35% to 30.7p and a 24% rise in dividends to 15p per share for FY 2022.

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