DS Smith de-rating 'overdone', says JPM Cazenove

DS Smith shares have underperformed peers over the past 12 months and after the paper and packaging maker completed its European acquisition, JPMorgan Cazenove believes the de-rating has been "overdone".

The Cazenove analysts reinstate their 'overweight' rating following completion of the €1.8bn acquisition of Europac and affixed a 400p target price, down from 600p before the period of restriction during the acquisition.

Include the impact of the acquisition and associated rights issue in its estimates, the 2020 adjusted operating profit forecast increases 26% to £769m and adjusted earnings per share by 5% to 41.5p, which includes the discontinued Plastics operations.

The shares have fallen 35% since the end of August, a de-rating that puts the shares on an EV/EBITDA ratio of 6.1 times one-year out, down from an average of 8.3x over the past three years, which analysts said was likely to be "reflecting paper price trends and downward revisions to GDP growth in key end-markets".

"It has underperformed most of its major peers in paper and packaging over the past 12 months, despite the protection its ‘short paper’ operating model provides to margins," they added.

With a 2020 free cash flow yield of 10%, Caz believe the de-rating "has been overdone".