6th Nov 2014 13:13
LONDON (Alliance News) - Jefferies is retaining a cautious outlook on recycled packaging company DS Smith PLC, saying that despite its solid trading update on Thursday, the acquisition of Spanish peer Andopack was not the kind of deal it needs.
The broker said that the group has reported first half corrugated volume growth of around 2% against subdued packaging demand in Europe, with improving margins year-on-year. The company has benefited from EUR40 million in synergies from the acquisition of SCA Packaging, which it bought for EUR1.6 billion in 2012.
But in spite of the growth, the second half looks potentially difficult for the company, Jefferies argues, given European packaging demand is linked to industrial production, which has declined 1.9% year-on-year.
But while its dividend yield looks attractive at 4%, the annualised GBP13 million foreign exchange and GBP16 million raw material headwinds the company faces mean caution is still required, Jefferies said.
The broker also said the GBP35 million acquisition of Andopack does not look like the kind of catalyst for growth that the business needs. Jefferies said that while there are European M&A opportunities in play, DS Smith is facing intense competition from both trade and private equity rivals.
"With SCA synergy benefits dissipating, DS Smith may struggle to deliver further margin expansion without mill portfolio investments/disposals," the broker said.
In the absence of a "more material M&A catalyst", Jefferies has retained its Hold recommendation and 310 pence price target on the stock.
DS Smith shares are up 3.0% at 274.51 pence Thursday afternoon.
By Sam Unsted; [email protected]; @SamUAtAlliance
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