The rise of convenience stores, discounters and online sales of goods and food is fuelling global demand for packaging solutions, even in today's climate of economic uncertainty. In fact, the sector's structural growth drivers and healthy cash flows mean it's one of the few currently capable of lifting investment portfolios, a rare status that's helping to dispel packaging's reputation as a dull industry.
Management teams operating across this vibrant sector have not been resting on their laurels, either. Most have taken advantage of an inviting backdrop by investing in existing product ranges, acquiring well-suited businesses to broaden reach and expertise and bumping up prices. The latter has mainly been achieved not only because of rampant demand, but also as a result of tightening supply owing to a raft of big mergers.
That includes Ball Corp's (US:BLL) soon-to-be-completed takeover of rival can maker Rexam (REX). The European Union's competition watchdog recently approved the £4.4bn acquisition after Ball satisfied competition concerns by selling 12 production plants on the continent.
Mondi (MNDI), which is jointly listed in Johannesburg and London, has responded to these favourable conditions by bumping up prices and implementing a big capital expenditure programme. In all, €500m (£381m) will be spent over the next few years to boost mill efficiency and capacity. Given the group has more than doubled its return on capital employed since 2009 to a market-leading 19 per cent, that certainly bodes well for shareholders.
Meanwhile, DS Smith (SMDS), whose corrugated boxes are frequently used by online retail giant Amazon (US:AMZ), has been busy buying businesses in south-eastern Europe and Iberia. Those deals have enabled the group's savvy bosses to generate plenty of cost synergies and boost market share in the continent up to 16 per cent. To complement this progress, organic growth has been achieved by developing value-added services.
RPC's (RPC) acquisition strategy has also been fruitful. Europe's leading rigid plastic packaging manufacturer, which specialises in products ranging from drinking cups and bottles to deodorant containers and asthma inhalers, splashed out more than £1bn over the past two years on new businesses.
That rate of deals may sound alarming. But anyone familiar with management's reputation for cost-cutting, building share in a fragmented European market and entering growth regions, all while expanding the product range, will recognise the potential. Factor in an improving European economy, and we expect 2016 to be another great year for the group.
| Price (p) | Market cap (£m) | PE (x) | DY (%) | 1-year change (%) | Last IC view: | |
|---|---|---|---|---|---|---|
| MONDI | 1,213 | 4,455 | 14.0 | 2.5 | 12.8 | Buy, 1,469p, 17 Sep 2015 |
| REXAM | 611 | 4,310 | 16.2 | 2.9 | 37.5 | Accept, 556p, 04 Aug 2015 |
| RPC GROUP | 748 | 2,269 | 18.5 | 2.2 | 49.1 | Buy, 757p (adjusted for rights issue), 7 January 2016 |
| SMITH (DS) | 372 | 3,510 | 14.8 | 3.2 | 16.0 | Buy, 405p, 04 Dec 2015 |
Favourites
Concerns about its exposure to Russia triggered a 23 per cent drop in Mondi's share price since December 2015. That's left the group's shares trading on 11 times consensus earnings for the next 12 months, which, in our view, is way too cheap. As noted above, big investment in times of rampant demand and falling competition is encouraging, particularly when it's implemented by a management team with a track record for delivering. A falling oil price is a plus point as Mondi's huge manufacturing operations consume a lot of energy, while robust cash generation means a special dividend could soon be on the horizon.
Outsiders
Strong structural drivers backed by decent strategies mean prospects across the board are looking up. But as that's not reflected in any of the share prices, we anticipate upside for all.
