Prices of paper and pulp were still stuck in a glut in 2019. The fortunes of the FTSE 350 packaging companies were therefore determined by their ability to weather the downturns in a market that is exposed to price fluctuations in raw materials, end demand and overall capacity in the industry.
Mondi (MNDI) sounded its alarm in October's trading update, warning that reduced paper prices had hurt its profits. The update rippled across the sector – both Smurfit Kappa’s (SKG) and DS Smith’s (SMDS) share prices fell.
The industry downturn has set paper and pulp manufacturers on a defensive path that will likely continue into next year. We do not anticipate an immediate recovery, but long-term trends mean that prospects for the sector are encouraging. Online sales as a proportion of retailing hit 19 per cent in December last year, and while the rise of e-commerce has hurt retailers, it is only good news for packaging. As sustainability pressures weigh on plastic usage, the demand for 'greener' paper packaging solutions is picking up.
The sector's constituents are well positioned to meet this demand. Mondi’s management attributed growth in consumer packaging to greener product innovation. DS Smith reported in December that customers were increasingly valuing its sustainability solutions, while in May Smurfit Kappa introduced a new set of sustainability goals, having either met or exceeded previous targets ahead of its 2020 deadline.
The backlash against single-use plastics has opened up opportunity in sustainable business and it has not gone unnoticed. When the pulp market cycle picks up again, paper-based packaging operations are set to make significant gains. In the meantime, Mondi and Smurfit Kappa’s expansions into central and southeastern Europe, as well as DS Smith’s recent acquisition of Spanish rival Europac, should help them tap into promising long-term prospects for the sector.
| Company | Price (p) | Market cap (£m) | 12-month change (%) | Fwd PE | Dividend yield (%) | Last IC view | |
| DS Smith | 356 | 4,886 | 13 | 11 | 4.6 | Hold, 370p, 6 Dec 2019 | |
| Mondi | 1,639 | 7,943 | -10.3 | 12 | 4.5 | Buy, 1,495p, 10 Oct 2019 | |
| Smurfit Kappa | 2,736 | 7,673 | 28.7 | – | 3.3 | Buy, 2,608p, 31 Jul 2019 | |
