The paper and packaging industry is facing the effects of overcapacity and declining demand for their products. Last year, it also had to endure rising costs as prices of energy and raw material, such as polymers, sky-rocketed. As a result, most players are resorting to cost-cutting measures by shutting plants and reducing staff.
Packaging and office products firm DS Smith, which reported a 21 per cent fall in its first-half profits, will cut jobs and take other measures to save between £12m and £15m this year. Smurfit Kappa Group, Europe's largest maker of cardboard boxes, has also said it is going to cut capacity more than previously planned in order to reduce a glut in the market.
Mondi, a leading producer of paper and packaging, issued a profit warning last October. Its products range from office stationery to packaging used by retailers, the construction industry and white goods suppliers. Broker UBS said consensus earnings for Mondi for 2009 could be cut by a third or more. Mondi continues to evaluate the closure or reorganisation of higher cost operations, having already decided to cut 80 jobs at its plant near Rochester as it shifts production elsewhere. And the world's biggest can maker, Rexam, has been affected too, closing its Oklahoma City, US, plant in order to improve efficiency and reduce costs.
The cost-cutting measures should put these packaging companies in a good position to reap the benefits when the economy picks up. But even if the economy takes a turn for the better, it will be difficult to predict when exactly demand will match the over supply existing in the sector.
Summary of sector:
| Company | Price p | Mkt. value £m | PE ratio | Yield % | 12M price chng % | Last IC view |
|---|---|---|---|---|---|---|
| MONDI | 216 | 793 | 5.6 | 8.5 | -48.9 | Buy, 256p, 3 August 2008 |
| REXAM | 360.75 | 2319 | 10.8 | 5.7 | -12.5 | Buy, 382p, 31 July 2008 |
| SMITH (DS) | 80.25 | 316 | 4 | 11.0 | -61.8 | Fairly priced, 57p, 3 December 2008 |
