From the development status of European corrugated packaging giants to see the trend of the carton industry in 2023
This year, European carton packaging giants have maintained high profits despite the deteriorating situation, but how long can their winning streak last? Overall, 2022 will be a difficult year for the major carton packaging giants. With the rise of energy costs and labor costs, the top European companies including Schmofi Kappa Group and Desma Group are also struggling to deal with paper prices.
According to analysts at Jeffries, since 2020, the price of recycled containerboard, an important part of packaging paper production, has almost doubled in Europe. Alternatively, the cost of virgin containerboard made directly from logs rather than recycled cartons has followed a similar trajectory. At the same time, cost-conscious consumers are reducing their spending online, which in turn reduces demand for cartons.
The glory days once brought about by the new crown epidemic, such as orders running at full capacity, tight supply of cartons, and soaring stock prices of packaging giants…all of this is over. Even so, however, these companies are doing better than ever. Smurfi Kappa recently reported a 43% rise in earnings before interest, taxes, depreciation and amortization from January to the end of September, while operating income rose by a third. That means its 2022 revenue and cash profits have already surpassed pre-pandemic levels, despite being a quarter of the way to the end of 2022.
Meanwhile, Desma, the UK’s number one corrugated packaging giant, has raised its forecast for the year to 30 April 2023, saying adjusted operating profit for the first half should be at least £400 million, compared with 2019. was 351 million pounds. Another packaging giant, Mondi, has boosted its underlying margin by 3 percentage points, more than doubling its profit in the first half of the year, despite remaining unresolved issues in its more thorny Russian business.
Desma’s October trading update was sparse on details, but mentioned “slightly lower volumes for comparable corrugated boxes”. Likewise, Smurf Kappa’s strong growth is not the result of selling more boxes – its corrugated box sales were flat in the first nine months of 2022 and even fell by 3% in the third quarter. On the contrary, these giants increase the profits of enterprises by raising the prices of products.
In addition, the trading volume does not seem to have improved. In this month’s earnings call, Smurfi Kappa CEO Tony Smurphy said: “The transaction volume in the fourth quarter is very similar to what we saw in the third quarter. Picking up. Of course, I think some markets like the U.K. and Germany have been flat for the last two or three months.”
This begs the question: what will happen to the corrugated box industry in 2023? If the market and consumer demand for corrugated packaging start to level off, can corrugated packaging manufacturers continue to raise prices to obtain higher profits? Analysts were pleased with SmurfKappa’s update given the difficult macro backdrop and weaker carton shipments reported domestically. At the same time, Smurfi Kappa stressed that the group had “extraordinarily strong comparisons to last year, a level we have always considered unsustainable”.
However, investors are very skeptical. Shares of Smurfi Kappa are 25% lower than at the height of the pandemic, and Desmar’s are down 31%. Who is right? Success doesn’t just depend on carton and board sales. Analysts at Jefferies predict that recycled containerboard prices will fall given weak macro demand, but also emphasize that waste paper and energy costs are also falling, because this also means that the cost of producing packaging is falling.
“What is often overlooked, in our view, is that lower costs can be a huge boost to earnings and ultimately, for corrugated box manufacturers, the benefit of cost savings will be at the expense of any potential lower box prices. It has been shown before that this is more sticky on the way down (3-6 month lag). Overall, revenue headwinds from lower pricing are partially offset by cost headwinds from revenue.” analyst at Jeffries Say.
At the same time, the question of requirements itself is not entirely straightforward. Although e-commerce and the slowdown have posed some threats to the performance of corrugated packaging companies, the largest share of sales of these groups is often in other businesses. At Desma, about 80% of revenue comes from fast moving consumer goods (FMCG), which are mainly products sold in supermarkets, and about 70% of Smurfi Kappa’s carton packaging is supplied to FMCG customers. This should prove resilient as the end market develops, and Desma has noted good growth in areas such as plastic replacement.
So while demand has fluctuated, it is unlikely to fall below a certain point – especially given the return of industrial customers hit hard by the COVID-19 pandemic. This is backed up by recent results from MacFarlane (MACF), which noted a 14% rise in revenue in the first six months of 2022 as a recovery in aviation, engineering and hospitality customers more than offset a slowdown in online shopping .
Corrugated packers are also using the pandemic to improve their balance sheets. Smurfi Kappa CEO Tony Smurphy emphasized that his company’s capital structure is “in the best position we’ve ever seen” in our history, with a debt/earnings before amortization multiple of less than 1.4 times. Desmar chief executive Myles Roberts echoed that in September, saying his group’s debt/earnings before amortization ratio had fallen to 1.6 times, “one of the lowest ratios we’ve seen in many years”.
All of this adds up to meaning some analysts believe the market is overreacting, particularly with regard to FTSE 100 packers, pricing in as much as 20% lower than consensus estimates for earnings before amortization. Their valuations are certainly attractive, with Desma trading at a forward P/E ratio of just 8.7 versus a five-year average of 11.1, and Schmurf Kappa’s forward P/E ratio of 10.4 versus a five-year average of 12.3. Much will depend on the company’s ability to convince investors that they can continue to surprise in 2023.
Post time: Dec-13-2022
