Questor share tip: DS Smith shares look oversold

The company generates about 65pc of its earnings in euros and more than 70pc of its revenue comes from outside of the UK. DS Smith said a change of one euro cent in the pound/euro exchange rate affected pre-tax profit by about £1.2m.

The packaging group manufactures recycled cardboard boxes that are used to hold products such as washing powder and tinned tomatoes on supermarket shelves and the rising price of paper and cardboard has also eaten into profitability.

DS Smith’s debts have increased following the deal to buy Swedish packaging firm SCA Packaging in 2012: net debt increased to £827m at the end of April.

That said, DS Smith’s sales are linked to consumable products and fast-moving consumer goods.

Stocks with exposure to consumer goods are seen as a good defensive bet during a downturn: people will continue buying cleaning products long after they have reined back luxury purchases, meals out and gifts.

Market consensus is for DS Smith to increase pre-tax profits to £271m, on revenue of £4.12bn in the year ended April, giving 24.2p in earnings per share. That leaves the shares trading on 10.8 times forecast earnings and looking oversold.

DS Smith now trades at a 10pc discount to sector peer Mondi and the wider European packaging sector. The shares are now down slightly on our initial advice (Buy, 267.5p, September 4).

While investors wait for a recovery there is also a prospective dividend yield of 4.3pc on offer, and that dividend is covered more than twice by earnings and almost twice by free cashflow. Questor maintains the long term view on DS Smith: buy.

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