Hobson: DS Smith is Leader of the Packaging

Morningstar columnist Rodney notes the strong performance of packaging firm DS Smith, with profits up 30% on the year

Rodney Hobson 14 June, 2019 | 9:34AM

Winning trophy

Packaging – don’t you just hate it? We tear it off half the goods we buy and throw it away as soon as we get home; it clogs landfill and pollutes oceans; and even the stuff that can be recycled requires polluting refuse lorries and chemical processes.

Yet, somehow, we can’t live without it. Even the newspapers that rail against plastic waste wrap their supplements in it. Packaging companies should not be ignored by investors.

DS Smith (SMDS) put in a great performance in the year to April 30, increasing volumes by 2.4%, revenue by 12% and profits by more than 30%. The dividend is increased by 13% to 16.2p.

The return on sales improved by more than a percentage point to 10.2% and guidance is for the figure to hold up in double figures over the medium term. Cash flow leapt 85%. Cost savings from the Europac acquisition are now expected to be €70 million rather than €50 million. Smith is selling its plastics division to concentrate on the increased demand for corrugated packaging.

It’s hard to understand why the shares slid alarmingly from 580p last June to less than 300p by year end. They have picked up somewhat this year and surged 6% to 365p on the results but I feel they are still undervalued. The yield is a decent 4.4% based on last year’s dividend and it is reasonable to expect a further increase in the payout for the current year.  

RPC Resurrected

Meanwhile, RPC (RPC), which fell out of favour because of its use of the dreaded plastic, has been resurrected by a bidding war. The shares slipped from more than £10 at the end of 2016 to 660p at the end of last year, despite a series of encouraging trading updates, before an initially unsuccessful approach pushed them higher.

Despite initial disappointment that saw the shares back down to 630p, Berry Group started due diligence and when a group of funds led by Apollo Management stuck in a cheeky offer of 782p a share, Berry was forced up to 793p.

I think that’s the best that shareholders such as myself can hope for – at least I will come out with a small profit after including the dividends I have received in the meantime – but with RPC trading at 792p it is fair enough to stick it out for the extra copper, as there is virtually no downside now that regulatory approval has been forthcoming. There is now just the outside possibility that Apollo will come back with more, though I don’t expect it to.

However, it is worth considering selling in the market and buying DS Smith instead before it is too late.

Come Clean

In a shameful disregard for shareholders – you know, those people who actually own the company – consumer products group PZ Cussons (PZC) blandly announced the resignation of its chief financial officer, Brandon Leigh, without any explanation this week.

Leigh stepped down from the board immediately and it is clear that this has come out of the blue, as a make-shift arrangement has been put in place while a permanent replacement is sought.

Such an occurrence naturally raises question marks over the relevant person but surely not in this case as Leigh is such a splendid chap that chair Caroline Silver felt moved to thank him for his “significant contribution” and his “leading role”.

Despite assurances that trading in the just-ended year to May 31 was generally resilient and in line with guidance given in the past two updates, the shares promptly slumped 10p to 192p before clawing their way back throughout the day to stand a touch higher at 202.5p. 

Directors cannot wash their hands of their responsibility to shareholders, not even with Imperial Leather soap.

Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice, nor are they the opinions of Morningstar

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
PZ Cussons PLC205.00 GBX1.49
Smith (DS) PLC324.40 GBX-0.12

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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