DS Smith to sell plastics division, says trading remains 'strong'

DS Smith said on Wednesday that trading since 1 November has continued to be strong and in line with its expectations, as it announced the sale of its plastics division to Olympus Partners for an enterprise value of $585m (around £450m).

The division comprises the plastics operations, including flexible plastics, rigid plastics and foam products.

The packaging company said the sale - which is due to complete in the second half of the year - represents an important step in its continued progress as a leader in sustainable packaging and accelerates the programme of deleveraging, alongside organic cashflow.

DS Smith expects net cash proceeds after tax, transaction adjustments and expenses of about £400m, which will be used to reduce financial gearing, in line with its medium-term target of net debt/EBITDA at or below 2.0x.

Chief executive Miles Roberts said: "I am delighted to confirm that we have reached an agreement for the sale of our plastics division. The transaction is attractive both financially and strategically for DS Smith as, together with the acquisition of Europac, we reinforce our position as a leader in sustainable packaging with a clear focus on our fibre-based business.

“My colleagues in the plastics division have worked hard to build the business into the success that it is today, and that quality has been recognised by Olympus Partners.”

The company also provided a brief update on trading, which it said remains "strong" and in line with its expectations.

DS Smith said it continues to see good corrugated box volume growth with continued market share gains driven by the quality of its offering to large and e-commerce customers and its FMCG -weighted customer base.

The Christmas period was especially busy for its e-commerce focused customers, it said, while the US business is still performing well, with strong margins and returns ahead of the group’s acquisition case.

Smith said group margins are expected to progress further in the second half of the year and operating cashflow generation is stronger than in the comparable period last year.

Russ Mould, investment director at AJ Bell, said the sale of the plastics division may well win the company some brownie points with green campaigners given mounting concern about the environmental impact of plastic.

"However, while the company gives a nod to sustainability when revealing the rationale for selling the asset, in reality this is more about shoring up a somewhat over-extended balance sheet.

"It looks a sensible hard-nosed business decision, given the sale will only have a modestly dilutive impact on earnings in return for setting the company on the path to its targeted debt-to-earnings ratio of less than two times.

"However, it would be wrong to entirely dismiss the sustainable angle to this - just yesterday packaged goods firm Nestle announced plans to make 100% of its packaging recyclable or reusable by 2025, with a specific emphasis on avoiding plastic waste.

"A robust update on trading alongside today’s news from DS Smith may also go some way to restoring faith in the structural growth story which helped drive investor interest in the packaging space, namely the expansion in online shopping which requires goods to be packaged up for delivery.

"This theme appeared to lose some momentum late last year when the sector endured a heavy sell-off."

At 0950 GMT, the shares were up 3.7% to 361.91p.