Corrugated packaging is big business these days, thanks to the unstoppable rise of internet shopping, but there are challenges too, amid growing concerns over single and multi-use plastic packaging.
DS Smith
FTSE 100-listed international packaging company DS Smith (LSE: SMDS) has seen its share price swing about lately, up 50% over five years, but down 26% over the last two.
It is down another 3% today, even though its half-year results proclaimed “record group profitability and return on sales despite economic headwinds”, along with market share gains and margin improvements. However, it was hit by difficult conditions for its industrial customers in the German car industry.
This £5bn company is a global operation, with major interests in Europe and the US, where it is posting volume increases and new business wins. Its return on sales ratio rose by 11%, a sign that it is growing efficiently. This was right at the mid-point of its recently upgraded target range of 10%-12%.
It said this reflects its focus on value-added packaging and strong pricing discipline, together with good progress and synergy delivery from its recent Europac acquisition, which more than offset “the reduced margin in North America as a result of lower pricing for paper export”. Its Indiana greenfield box plant is now operational.
Group CEO Miles Roberts anticipates acceleration of volume growth in the second half of the year, “assuming current macro-economic conditions prevail”. Recent share price disappointment has left the stock trading at just 10.9 times forward earnings, which is in bargain territory for a company that continues to grow strongly.
DS Smith offers a healthy yield of 4.4%, covered 2.1 times, exactly in line with the FTSE 100 average. A 14.5% return on capital employed is okay, although not spectacular. You could say the same about forecast earnings growth, predicted to be 5% in the year to 30 April 2020, followed by 2% the year after. That is quite a slowdown given that earnings grew by double-digits in four of the last five years. I still reckon it looks a solid prospect, while Rupert Hargreaves thinks it’s a dividend hero.
Smurfit Kappa
Another FTSE 100 packaging provider, Smurfit Kappa Group (LSE: SKG), has had a slow year share-price-wise, trading at roughly the same level as 12 months ago. It still trades 100% higher than it did five years ago, though. Can it regain that momentum?
The £6.29bn multinational is turning green concerns to its advantage, with CEO Tony Smurfit saying that as consumers increasingly demand sustainable packaging solutions, the group’s unique applications, knowledge and expertise in paper-based packaging leaves it “ideally positioned to take advantage of this mega trend”.
With 46,000 employees across more than 35 countries, the Smurfit Kappa share price is underpinned by geographical diversification. Latest figures show EBITDA earnings up 11% to €1.26bn for the nine months to September.
That said, City analysts expect earnings to remain flat this year, and fall 3% in 2020, with the pace of revenue growth slowing as well. The forecast yield is 3.8%, well covered 2.7 times. Fool colleague Manika Premsingh has questioned whether Smurfit Kappa can maintain its margins as prices soften, and is worried about its debt-funded acquisition spree. However, both of us believe the long-term picture remains promising.