DS Smith Well Placed for Packaging Revolution

The Week: Morningstar columnist Rodney Hobson unpacks the latest update from packaging group DS Smith, which is benefiting from move away from plastics

Rodney Hobson 6 December, 2019 | 9:34AM
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The first thing you do with packaging is to tear it off and throw it away, yet there is no doubting the need for it. And in these anti-plastic days we should be celebrating the success of paper-based packaging.

It was a surprise, therefore that packaging group DS Smith (SMDS) saw its shares drop 7% on perfectly satisfactory half year results to October 31. Revenue rose 4% and pre-tax profits 31% as the return on sales improved strongly, while the interim dividend is raised by 4%. The figures followed an excellent performance in the second half of the previous year, so perhaps investors were hoping for better.

The sale of the plastics division, bringing in £400 million, should be completed by the end of this month, leaving the group to benefit from the trend towards sustainable packaging from paper and fibres. Smith reckons sales volumes will accelerate in the second half.

The shares have moved erratically around the current level of 350p for just over a year now and investors are understandably cautious after the slump from 590p to 300p in the second half of 2018. Assuming the final dividend is also raised by 4%, the prospective yield is 4.8%. Well worth considering.

Don’t Underestimate Dunelm

Another trading update from homewares retailer Dunelm (DNLM), another chance to regret that once again I have failed to take advantage of share price weakness since the last one. Perhaps I can’t quite believe that any company in the sector is so well managed that it can thrive in current market conditions.

The latest cause for joy is that all customers have been moved onto Dunelm’s new digital platform. I would normally scorn any company that puts the following drivel into its update: “We now have a modern, flexible, cloud-native platform that will be used to accelerate the development of our customer proposition.”

However, you mock Dunelm at your peril. The company says customers have responded well to the new website and there has been no adverse impact on performance, with strong sales growth maintained in stores and online. Perhaps it should sell its services to all those companies that have made a pig’s ear of installing new digital platforms. One or two banks spring to mind. That would be after offering consultancy services to Marks & Spencer (MKS) and Next (NXT) on how to sell homewares.

With gross margins stronger than expected and costs staying under control, full year profits are set to beat previous forecasts.

The shares rose nearly 20% to a new high of 995p. They have almost doubled since last Christmas Eve. I shall wait for the shares to fall back again and probably miss the opportunity yet again if they do. Good luck to anyone who grasps the nettle and invests now – you are unlikely to regret it.

The next trading update, on January 9, will cover the Christmas period and the impact of the general election. I can’t wait for another chance to report that I’ve missed the opportunity to invest once again.

Out of Character

Toys and games developer and distributor Character (CCT) reported revenue up and profits down in the year to the end of August but that was just about tolerable as we were warned in a previous update.

The worrying bit is the downbeat outlook for the first half, which includes Christmas, when you’d expect toys and games to be in demand. Even a rise in the interim dividend could not prevent a 4.8% fall in the share price. It’s too early to be thinking of buying for recovery.

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.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Character Group (The) PLC296.00 GBX0.68
Dunelm Group PLC1,057.00 GBX0.76
Marks & Spencer Group PLC300.90 GBX1.69Rating
Next PLC9,040.00 GBX0.02
Smith (DS) PLC350.40 GBX0.92

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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