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Mondi and DS Smith share price: Packaging the profits

By David Burrows

09:16, 26 May 2022

DS Smith HGV on UK motorway. Photo: Alamy
D S Smith and Mondi have both seen their stock price fall heavily this year. Photo: Alamy

Are FTSE 100 major packaging groups Mondi (MNDI), and DS Smith (SMDS) good value right now? 

In August 2021, Mondi’s stock price was as high as £20.68, but by early February 2022 the shares had fallen to around £19.50 and a month later the price dropped as low as £12.71 before recovering to its current £15.20 level.

Does it look attractive at that price? According to Berenberg analyst Lydia Kenny it does. Earlier this week the broker upgraded Mondi from a ‘hold’ to a ‘buy’ and increased the target price from 1865p to 2000p. 

Kenny pointed to Mondi being able to generate some of the highest returns in the sector as well as the firms impressive environmental, social and governance (ESG) credentials.

Mondi (MNDI) share chart

Back in September 2021, Berenberg expressed concern about the group’s exposure to plastics. Its engineered materials division had been in structural decline and dilutive to margins over recent years. 

More recently the analyst was worried about Mondi’s exposure to Russia but according to Kenny both of these issues have been addressed meaning, as far as Berenberg is concerned, Mondi is now well positioned to benefit from secular trends. 

Berenberg is not alone in seeing potential in Mondi, earlier this month JPMorgan Chase & Co. reiterated an ‘overweight’ rating on shares of Mondi and Morgan Stanley reiterated an ‘equal weight’ rating. 

DS Smith has seen similar stock valuation drops to Mondi. At the start of the year DS Smith was priced at around 400p a share; and has fallen steadily since, now valued around the 300p level.

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Sharp sell-off

As David Jones chief market strategist at Capital.com explains, when it comes to the packaging sector, the stocks mentioned have all traded fairly similarly over the past few months.

“There was a sharp sell-off for the two on the Russian invasion of Ukraine and then there has been a period of consolidation. So, on the plus side, those invasion lows have not been taken out and we have seen some stability for the companies share prices.”

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He adds “Longer term investors may want to still sit on their hands and watch the sector to see if these stocks really are making a base down here. But for those with a shorter-term mindset, the likes of Mondi and DS Smith could be a trading buy down here, particularly if they thought that we had seen the worst for stock markets in general for at least a few months."

Strong performer in tough climate

Sophie Lund-Yates, Equity Analyst at Hargreaves Lansdown sees good things in D S Smith right now.

“While most businesses nurse growing inflationary wounds, DS Smith is out there proving that people will pay anything for a product they need. In fact, DS Smith's doing more than coping, the cardboard box maker is thriving in a difficult environment.”

She points out that the group is a key supplier to ecommerce groups - providing the cardboard boxes that have become a familiar sight outside houses up and down the country, as we shifted to online shopping during lockdown.

“DS Smith also sells its boxes to consumer goods and food groups. These include many of the ''shelf-ready'' cardboard boxes you'll find in the supermarkets. Those two groups make up over 80% of DS Smith's business. Demand in these segments is holding up - consumers are keen to shift away from plastic packaging and reliance on e-commerce is a trend that's here to stay”.

DS Smith (SMDS) share chart

Crucially, Lund-Yates explains, profits have come along for the ride.  She adds: Costs are an ongoing point of interest where DS Smith's concerned. It makes much of the paper it needs in-house, and wants to cut that even further to around 60%. This means DS Smith gets its raw materials cheaper when paper prices fall in tough times”.

However, as Lund-Yates says, when the industry is booming and paper is more expensive the group's margins get squeezed. “With commodity prices on the rise, this goal likely isn't a priority. Input costs are also on the rise, and to cope, DS Smith is increasing its own packaging price. This strategy is offsetting those higher costs. This hasn't upset demand so far, insulating the group from inflationary headwinds.”

She concludes: “Overall, DS Smith is in a strong position with exposure to attractive end markets. We don't think those strengths are necessarily reflected in the current valuation but remember this also reflects the ongoing uncertainty.”

Markets in this article

MNDI
Mondi
15.95 USD
0.07 +0.450%
MNDI
Mondi
15.95 USD
0.07 +0.450%
SMDS
DS Smith PLC
4.228 USD
0.018 +0.430%

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