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The DS Smith share price is up 30%: should I buy now?

·3-min read
Hand arranging wood block stacking as step stair on paper pink background

The DS Smith (LSE: SMDS) share price rose 30% in the past year. The box maker has outperformed the FTSE 100 index, which rose about 10% in the same period.

Should I consider buying DS Smith shares for my portfolio?

DS Smith’s recent results

DS Smith released its fiscal year 2021 results on 22 June 2021. Revenue fell 1% to £6.0bn. However, the e-commerce growth helped offset the revenues lost in the early part of the year due to Covid-19 disruptions. Also, the company’s focus on fibre-based packaging has helped the company to win more business. In the words of chief executive Miles Roberts,“The growth drivers of e-commerce sustainability and plastic-free packaging have accelerated over the last twelve months and we are very well placed to capitalise on this growth.”

The company’s pre-tax profit fell 37% to £231m. However, management is confident that it has exited the year in a better position. They believe that higher costs are more related to Covid-19 during the early part of the year. In the second half of the year, the profits improved, particularly in the North American region. The group’s second-half adjusted operating profit was £272m compared to £230m during the first half.

DS Smith’s free cash flow improved to £486m from £354m for the previous year; it was mainly due to the good cash management. It also helped to reduce the net debt to £1.8bn, which is positive. As a result, net debt to EBITDA (earnings before interest, taxes, depreciation, and amortisation) is currently 2.2 times. This is below the banking requirement of 3.75 times.

The company announced the final dividend of 8.1p per share. This is in addition to the interim dividend of 4.0p previously announced in December 2020, taking the total dividend to 12.1p. This is encouraging since the company did not pay dividends last year due to the uncertainty in the macro environment.

Risks that might impact DS Smith’s share price

Looking into the cost structure of the company, the majority of costs are variable, which will increase even though revenues increase. In addition, the input costs increased this year due to higher fabric prices which increased the cost of paper production. This is a bit of concern for me and I will be closely watching the costs.

Covid-19 cases have once again started to increase in many parts of the globe. It is too early to believe that the company will return to strong growth. If cases increase, more lockdowns could negatively impact the DS Smith share price.

Final view

The company’s performance in the past year has been satisfactory. I believe that the company will benefit from the e-commerce boom in the long term. This is one reason why I like the stock. But, I am not fully convinced that profits will improve soon. So, I will keep the stock on my watchlist for now and I am not a buyer of the stock today.

The post The DS Smith share price is up 30%: should I buy now? appeared first on The Motley Fool UK.

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Royston Roche has no position in any of the shares mentioned. The Motley Fool UK has recommended DS Smith. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2021

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