Paper and packaging is an unfashionable and frequently overlooked sector within the FTSE 350 firmament, but one benefiting from the structural changes in retail and through increased economies of scale as consolidation gathers pace in the European market.
Two IC buy calls in the form of RPC (RPC) and DS Smith (SMDS) have performed well over the past year, with both companies augmenting solid organic growth rates through targeted acquisitions. The last of these, RPC’s capture of ESE World BV from private equity company Stirling Square Capital Partners, promises to add another E200m (£175m) to the diversified plastics group’s top line. The deal left RPC well within its net debt target range of 2-2.5 times cash profits and demonstrates the opportunities in a relatively fragmented European packaging market.
Sector peer Mondi (MNDI) has been on a veritable buying spree through 2016, adding the outstanding share capital of Turkish consumer packaging company Kalenobel to its stable, along with two Russian packaging firms in the form of ZAO Uralplastic-N, a specialist in food, hygiene and homecare products, and LLC Beepack, which makes a range of corrugated packaging trays and boxes for food and agricultural products.
UK e-commerce sales marching upwards
Growth will continue to be bolstered by changing consumer trends. Online retailing has created a new business strand in e-commerce packaging that is used not simply to protect goods during the distribution process, but to promote vendors and product lines and facilitate a convenient system for returns. If online commerce is hastening the demise of traditional, high-street retail models, it’s proving to be something of a boon for this sector. It is also driving innovation: packaging companies are increasingly designing interactive products aimed at smartphone-savvy consumers. The aim is to present information and engage potential customers through Bluetooth and other forms of near-field communication via interactive coding.
DS Smith has moved to exploit this changing industry landscape. Aside from the group’s products serving the online market, last year it secured deals to acquire specialist providers of point-of-sale packaging: London-based Creo Retail Marketing and Deku-Pack in Denmark. These companies provide the type of in-store promotional packaging increasingly found near retail checkout counters.
As a recycled packaging group, DS Smith has benefited from the steady increase in environmental strictures in Europe. However, some industry-watchers believe that the European Commission is now engaged in a process designed to water down environmental protections in packaging and other commercial areas, under the guise of slashing red tape. Critics have often claimed that stringent environmental regulations have been a key factor restraining market growth, so there is a chance that policymakers move to prioritise job creation over green issues.
| Price (p) | Market value (£m) | PE (x) | Yield (%) | 1-year change (%) | Last IC view | |
| Mondi | 1,764 | 6,478 | 14.8 | 3.2 | 47.4 | Buy, 1,549p, 08 Aug 2016 |
| RPC Group | 1,065 | 3,533 | 20.2 | 1.8 | 44.2 | Buy, 1,052p, 20 Dec 2016 |
| Smith (DS) | 434 | 4,110 | 14.3 | 3.1 | 18.6 | Buy, 405p, 08 Dec 2016 |
| Smurfit Kappa | 2,060 | 4,869 | 13.3 | 2.9 | 21.3 | Buy, 1,763p, 1 Aug 2016 |
Favourites: RPC is well up on our buy call from a year ago, priced for growth, and intent on scaling up operations in a marketplace that’s undergoing a consolidation phase. The group posted a surge in revenues at the half-year mark on the back of a series of acquisitions and we envisage further earnings upgrades as synergies are brought to bear through 2017.
Outsiders: It’s difficult to pick an outsider in a sector with these fundamental growth drivers, but valuations for another IC buy call, packaging and paper specialist Mondi, could be under pressure following strong gains over the past 12 months. That said, pricing weakness on certain packaging grades have already started to ameliorate and City sentiment towards the stock remains favourable.
