Excitement over a cardboard box tends to cease for anyone over the age of nine. Though some investors laud dull, cash-generating businesses, container board makers such as Smurfit Kappa, DS Smith and Mondi have done little to earn any applause of late.
Despite near record profit levels and margins, their price to forward earnings multiples deflated sharply last year. Tougher times may lie ahead. But the sector’s improving value and defensive qualities deserve some attention.
The bad news is that profitability has almost certainly peaked. A boom in online shopping did sustain after the pandemic ended, allowing box makers to maintain pricing power. That enabled these three integrated producers to pass on cost rises to customers. That will end, partly because energy prices have fallen. UK natural gas prices have halved in the past month alone.
The market has priced in the worst. Share prices for the above have lost an average of about a fifth over the past year. Trading on mid-teen forward earnings multiples two years ago, the three cardboard makers have an average ratio closer to 9 times.
With the bulk of packaging demand coming from food and fast-moving consumer goods, investors are right to be cautious. Listed grocers Tesco and Sainsbury’s already anticipate lower operating earnings for the current fiscal year.
Of the three, Europe’s leading box maker Smurfit Kappa should best weather the coming downturn. True, its earnings per share might fall by 28 per cent next year, thinks Cole Hathorn of Jefferies. But he notes the company’s relatively low paper production costs. It has appropriate energy hedges in place for the next year.
Smurfit should easily meet its payouts to shareholders. Estimated free cash flow of £546mn next year more than covers a dividend payment of some £330mn, a yield of 3.7 per cent. Still, that number needs to rise before the shares begin to attract attention. One-year gilts offer 3.3 per cent.
A higher dividend payout, opening the gap between the two yields, would at least buff up an otherwise dull holding for income investors.
If you are a subscriber and would like to receive alerts when Lex articles are published, just click the button “Add to myFT”, which appears at the top of this page above the headline.