DS Smith

DS Smith has been the UK's leading papermaker for over 30 years and is a leading provider of sustainable packaging solutions, paper products and recycling services worldwide, operating in 30 countries and employing over 30,000 people. Its customers are largely fast-moving consumer goods companies that produce goods typically sold in supermarkets and via e-commerce channels.

We see long-term structural drivers supporting DS Smith, most importantly the shift from plastics to paper packaging in consumer goods as well as the increasing popularity of online retailing. The company has built a strong reputation as a sustainable packaging company, with innovative packaging solutions made from recycled and recyclable material. It also provides a full recycling and waste management service.

In our recent engagement with management, we have discussed the benefits of its investments into environmental and social practices. Communicating these benefits to customers has helped to drive a further increase in market share. DS Smith has incorporated ESG measures, covering its net zero commitments, health and safety and community programmes, into their management remuneration schemes.

We see DS Smith's long-term trend in earnings as upwards, both organically, supported by structural drivers, and through earnings accretive acquisitions. The industry tends to exhibit supply discipline over time, with signs that pricing power is gradually improving with each cycle as the industry consolidates. However, we recognise that in the short term swings in demand can cause periods of industry over-capacity, resulting in downward pressure on pricing. This can cause some variability in earnings, as we have seen in the past three years. Profits increased sharply as consumer demand initially spiked due to the first wave of Covid-19 lockdowns, as the number of home deliveries and the associated demand for packaging rose sharply before falling back.

We tend to see this cyclicality as creating buying opportunities. We saw one such opportunity in mid-2023 when the share price had fallen back sharply, allowing us to add to our holding at depressed levels. We had previously reduced our holding at higher levels.

We see DS Smith as an industry leader that is well positioned for a recovery in volume growth, yet this is not priced in at its current depressed valuation of around 9x earnings and 6% dividend yield. Historically the stock has tended to see its valuation re-rate sharply once investors see an inflection in industry profitability.