DS Smith PLC and other boxmakers offer good way to invest in

Box-makers  (), () and () are still only on the “crest of sustainability and e-commerce waves”, with the circular economy and e-commerce potentially leading to opportunities to increase volumes and add value for the sector.

This is the view of venerable German investment bank Berenberg as it upgraded DS Smith, “the cheapest in our coverage”, to ‘buy’ and started off Smurfit Kappa with a ‘buy’ and Mondi at ‘hold’.

In the past, the market has viewed the cardboard and paper packaging companies as a cyclical commodity plays as previously viewed by the market, with the fluctuations of the paper price dictating profitability and share prices.

“However, we believe the sector ticks many more boxes,” the bank’s analysts said. “It is transitioning into a higher-quality industry with consistent, growing returns and exciting structural drivers.

“The market looks set to consolidate further, returns have proven resilient though the cycle and the sector’s importance to the circular economy and e-commerce megatrends is increasingly appreciated.”

As a result, the shares are expected to continue to rerate as good earnings momentum is reported, leading to the upgrade for DS Smith despite a strong run, and with Smurfit Kappa the preferred pick of the three and becoming a ‘top pick’ in the bank’s wider coverage.

The expected post-COVID cyclical upswing is likely to result in a strong recovery in demand for the sector, the analysts said, expecting
better volumes and a strong pricing environment for corrugated packaging and a number of other factors to support positive pricing and margin expansion over the coming years such as rising export demand, improving paper prices, normalising input costs and the unwinding of COVID-related costs. 

As for sustainability and e-commerce, the replacement of plastic as a packaging material is seen as potentially boosting demand for corrugated packaging by 0.60-1.60% per year over the next 30 years.

“We believe online sales, which require significantly more packaging and are forecast by Euromonitor to record a 10% CAGR 2020-25, will also act as a tailwind to the industry.

“Together with the 2.5-3.5% volume growth that we forecast for the coming years, these tailwinds should benefit the largest, best invested and most innovative players,” the bank believes DS Smith and Smurfit offer the best ways to play these rends.

“We also see margin upside as FMCG customers focus on the design and functionality of packaging as a way to meet their own sustainability and e-commerce needs, supporting more value-added services.”