Smurfit Kappa Group PLC and DS Smith PLC up to buy as Jefferies turns

Both () and () have been upgraded to ‘buy’ from ‘hold’ by analysts at Jefferies as the broker said it is “more positive” on the paper and packaging industry in 2021 as a tighter inventory drove up prices in the sector.

In a note on Thursday, the broker said despite a ramp-up of supply in Europe, they expected “robust underlying European demand” supported by e-commerce, sustainability and “some…industrial recovery” in the second half of the year, as well as increased exports to China.

“In our view, sector risk/reward is to the upside as we see less probability of a bear case pricing scenario. Given the better balance sheets, higher margins/[return on capital employed] over time and combined with future e-commerce and sustainability tailwinds, in our view the UK packaging stocks deserve to trade on higher “through the cycle multiples”, Jefferies said.

For Smurfit, the broker also upped their target price to 3,950p from 3,450p following their positive reassessment of the sector, while DS Smith was raised to 440p from 370p as Jefferies said they did not believe the firm “deserves to trade on a valuation discount vs history in a sector where we see the possibility of a sustainability premium in the future”.

However, the broker said () was their ‘top pick’ for the sector and upped the target price to 2,050p from 1,850p and retained their ‘buy’ rating. Jefferies said Mondi deserved to trade on at a premium due to its “low-cost asset base…balance sheet strength…its diversified business, leading position in niche sack kraft paper & bags…and its greater potential earnings’ upside from current levels if macro recovers”.

Shares in Smurfit Kappa rose 0.8% to 3,642p in late-morning trading, while DS Smith climbed 1.4% to 403p and Mondi was up 1.3% to 1,848p.