Morning Note: Market news and an update from DS Smith.

Market News

Jerome Powell said Federal Reserve officials can afford to be “a little more cautious” as they lower rates toward a neutral level, and also noted the economy is in good shape. The 10-year Treasury yields 4.20%. Gold held steady at $2,644 an ounce as Macquarie raised its forecasts for 2025. The broker said that gold may push higher next year, possibly challenging the $3,000 mark, as the Fed cuts rates and central banks add bullion to reserves. Bitcoin pushed through the $100,000 barrier for the first time after Donald Trump picked crypto proponent Paul Atkins to head the SEC, with traders warming to the prospect of relaxed regulations.

US equities marched higher last night – S&P 500 (+0.6%); Nasdaq (+1.3%) – spurred on by tech stocks. In Asia this morning, markets were mixed a traders digested geopolitical tension in France and South Korea: Nikkei 225 (+0.3%); Hang Seng (-1.0%); Shanghai Composite (+0.1%).

The FTSE 100 is currently little changed at 8,344. Companies trading ex-dividend include British Land (3.15%), Johnson Matthey (1.57%), and Next (0.73%). Sterling trades at $1.2740 and €1.2080. One in four new cars registered in the UK in November were fully electric, the highest monthly market share for EVs in almost two years, New AutoMotive said.

Brent Crude ($72.40 a barrel) was steady as traders awaited a key OPEC+ supply meeting. Record US crude output is thwarting the cartel’s push for higher prices, according to MLIV.

Emmanuel Macron is seeking a new PM after the French government was toppled in a no-confidence vote. He’s due to address the nation at 8pm local time. Marine Le Pen said she’s ready to work toward a budget that’s acceptable to all. French bond futures remain steady.

Source: Bloomberg

Company News

DS Smith has today released results for the half-year to 31 October 2024 in line with market expectations. The International Paper deal is expected to complete in Q1 2025. In response, the shares are trading 1% lower this morning.

DS Smith is a leading international supplier of paper and packaging with annual revenue of almost £7bn. The focus is on value-adding packaging for consumer goods customers where the main structural growth drivers are growth in e-commerce, the drive for sustainable solutions to replace plastic packaging, and the requirement for more sophisticated packaging from retailers. The group has built a market leading multinational business through the acquisitions of Interstate in the US and Europac in Western Europe. It generates four fifths of its volume from more resilient fast moving consumer goods and other consumer related sectors. The group is also a leader in sustainability and operates a circular business where it collects and recycles more packaging than it produces. The medium-term target is to deliver organic volume growth of at least GDP +1% and a margin of between 10% and 12%.

DS Smith and International Paper shareholders have voted in favour of a recommended all-share offer from IP to combine the businesses and create an international sustainable packaging solutions leader. The deal is expected to complete in Q1 2025. International Paper transaction costs of £75m are reflected in statutory profits.

During the latest six months, the macro-economic environment has remained challenging with soft overall market demand. However, like-for-like box volume grew by 2%, spurred on by innovation.

As anticipated, packaging pricing has yet to fully reflect the input cost price increases experienced in 2024, and while the overall demand environment has been positive, packaging demand and paper pricing in the second quarter of the group’s financial year were not as strong as expected.

The North America and Eastern Europe regions were the fastest growing in terms of volume growth, with Northern and Southern Europe consistent with the prior year, reflecting the overall subdued market demand.

Revenue fell by 2% at constant currency (CC) to £3,371m, driven by lower selling prices (£124m), partially offset by box volume growth (£51m). While packaging pricing has increased sequentially since the start of the period, pricing was 5% (£160m) lower than the prior period, with the balance reflecting positive external paper and recyclate pricing.

Higher input costs, notably fibre and paper, were broadly offset by cost reduction and productivity initiatives. Adjusted operating profit fell by 38% at CC to £221m, in line with management expectations, driven by the expected lower packaging prices. The operating margin fell by 370 basis points to 6.6%, below the medium-term target.

There was a free cash outflow of £69m, due to working capital movements, and financial leverage increased to 2.8x net debt/EBITDA. This is above the target to be below 2.0x but well below the group’s primary covenant requirements of 3.75x. The interim dividend was raised by 3% to 6.2p.

Looking forward, the market trends experienced during the group’s second quarter have continued into the current quarter. Management continues to expect ongoing modest volume growth and packaging prices to improve sequentially through the year to recover higher input costs, while recognising the recent paper price weakness.

Source: Bloomberg