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FTSE 350: Packaging’s price problem

Cost pressures are a major threat, particularly as online shopping wanes
April 28, 2022

Two words have popped up repeatedly in statements from packaging companies this year: price increases. In an energy-intensive sector that is dealing with rising gas bills, logistical hold-ups and expensive raw materials, it’s crucial to be able to pass on costs to customers. The price of cardboard boxes, therefore, is on the up.

So far, price hikes have been successfully implemented. Smurfit Kappa’s (SKG) Ebitda margin dipped by less than a percentage point in 2021 despite “unprecedented cost inflation”, while DS Smith (SMDS) is actually attempting to widen its margins to 10-12 per cent. 

However, a question mark hovers over whether this can continue, or whether clients will eventually baulk at the bill. Shares in packaging companies tumbled in late February after Russia invaded Ukraine, suggesting investors are wary.

It is also doubtful whether packagers can sustain the stellar growth they achieved in lockdown, when online shopping went through the roof. Data from the Office for National Statistics shows that digital sales accounted for just 26.1 per cent of retail sales in Great Britain in March, compared with 34.4 per cent the year before.

There are encouraging signs, however. Demand for sustainable packaging is growing, as is demand for more sophisticated, fit-for-purpose boxes. Paper packagers have a natural advantage over plastic manufacturers here. Meanwhile, in a March trading update DS Smith noted above-average growth among its larger customers, as well as more successful price increases.

In the near term, concerns centre around supply issues, and fears that Russian aggression will negatively affect the flow of raw materials into Europe. However, a report by analysts at Jefferies suggests that oversupply could be an issue by 2024, as more graphic paper manufacturers turn to packaging. And compared with the US, the European packaging industry is still very fragmented. More acquisitions could be on the cards. 

 

NAMEPrice (p)Market cap (£mn)12-month (%)Fwd PEYield (%)Last IC View
DS Smith3294,517-21.0114.4Buy, 382p, 9 Dec 2021
Mondi1,5077,315-23.0114.1Hold, 1,480p, 3 Mar 2022
Smurfit Kappa Group3,3458,704-5.0123.4Hold, 4,049p, 9 Feb 2022
Source: FactSet