By Chris Bailey of Financial Orbit | Thursday 29 June 2017
Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
Fans of The Graduate will recognise the form, if not the precise wording of the title. Life has thankfully moved on from the 1960s and in today’s world of internet delivery and crowded consumer choice, packaging matters from both a practical and differentiating perspective.
Longer-term readers here have heard me say all of this before. Just over a year ago, I opined on DS Smith (SMDS) that; ‘Numbers-wise if you put the stock on a forward x12 EV/ebit basis you can easily get a target price above 450p. More than double digit upside plus a healthy and growing dividend yield wrapped around an attractive packaging-advertising theme is good enough for me.’
Well finally today, the shares appear to have decisively broken above this level. Happy days. Even more interestingly, they have done this on a day when the company announced a big acquisition and the placing of the equivalent of 7% of the share capital - events which often lead to a share price decline and not a rise.
The reason for the increase? The company is copying the strategy it has successfully rolled out across Europe over recent years and is taking it to the US. Or as it puts it itself in the presentation document ‘global convergence of DS Smith’s customer requirements’. The glowing testimony from a couple of chocolate companies (Nestle and Cadbury’s successor Mondelez) about the company and the anticipated strategy says it all.
Well that’s a first…normally Europe – especially the much criticised Continent – is way behind the US of A. But apparently in that fine area of (wait for it) ‘performance packaging’, the US could learn a trick or three from Europe. And DS Smith believes it is the company to help bridge that gap via the purchase of Interstate, a family-owned packaging company based on the East coast of the US for a total cost of just over $1.1 billion.
The multiples do not look overly crazy and, unsurprisingly in this low interest rate world, the deal is immediately accretive. More importantly – with the help of the capital raising – it not does horribly stretch the DS Smith balance sheet with net debt to ebitda pushing up to just over two times. Given the company’s history and focus on deleveraging via cash flow generation from its business exposure, I am not overly worried about this.
Bottom-line, it is always smart to back sensible deal-making companies focused on cash flow generation and driving global standards and trends. The future is…packaging. Just ask Mrs Robinson.
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