Buy DS Smith and Smurfit Kappa, Berenberg says

(Sharecast News) - Berenberg upgraded DS Smith to 'buy' and initiated coverage of Smurfit Kappa with the same rating in an upbeat note on prospects for the paper and packaging sector.
Analyst Eoghan Reid said the industry had been seen as a cyclical commodity play with the paper price dictating profitability but that it was now becoming a higher quality sector with consistent, growing returns.

Reid upped his rating on DS Smith from 'hold' and increased his target price to 475p from 290p. He started coverage of Smurfit Kappa with a 'buy' recommendation and a target price of €47.50 and initiated Mondi with a 'hold' rating and a £17.90 target price.

Prices are likely to rise after the pandemic based on strong demand for corrugated packaging, rising export demand, more normal raw material costs and unwinding Covid-19 costs, Reid said. DS Smith is the best way to buy into improving prices, he added.

More online sales and a move away from plastic packaging for environmental reasons will also support long-term demand, Reid said. As the biggest, most innovative companies, DS Smith and Smurfit Kappa are best placed to benefit, he said.

Improving returns and cash generation will also support the sector with high rates of investment return and consistent dividends, Reid said. Mondi and Smurfit Kappa have the best record and Smurfit's €1.3bn investment plan makes it the most attractive company on this basis.

"The sector ... is transitioning into a higher-quality industry with consistent, growing returns and exciting structural drivers," Reid wrote in a note to clients. "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."

Smurfit Kappa is the most consistent compounder in the sector but DS Smith is at an inflection point as a value name exposed to a cyclical recovery, Reid said. Mondi is the highest quality operator but its valuation is in line with peers and it has the lowest growth and the biggest exposure to plastic packaging.