Looking at the trend of the carton industry in 2023 from the development status of European corrugated packaging giants
This year, the carton packaging giants in Europe have maintained high profits under the deteriorating situation, but how long can their winning streak last? In general, 2022 will be a difficult year for the carton packaging giants. With the rise of energy costs and labor costs, the top European companies, including Smurf Cappa Group and Desma Group, are also working hard to deal with the problem of paper prices. Paper box
According to Jeffries’ analysts, since 2020, as an important part of packaging paper production, the price of recycled cardboard in Europe has almost doubled. In addition, the cost of native boxboard made directly from logs rather than recycled cartons follows a similar development trajectory. At the same time, cost conscious consumers are reducing their online spending, which in turn reduces the demand for cartons. Paper bag
The glorious years brought about by the COVID-19, such as orders running at full capacity, tight carton supply, and soaring stock prices of packaging giants, have all ended. However, even so, the performance of these companies is better than ever. Smurfit Cappa recently reported that its EBITDA increased by 43% from the end of January to September, while its operating income also increased by a third. This means that although there is still a quarter of time before the end of 2022, its revenue and cash profit in 2022 have exceeded the level before the COVID-19 epidemic.
Meanwhile, Desma, the top corrugated packaging giant in the UK, has raised its annual forecast as of April 30, 2023, saying that the adjusted operating profit in the first half of the year should be at least 400 million pounds, compared with 351 million pounds in 2019. Mengdi, another packaging giant, has increased its basic profit margin by 3 percentage points and more than doubled its profit in the first half of this year, although it still has Russian business in a more difficult situation due to unresolved problems. Hat box
Desma’s transaction update details in October were few, but it mentioned that “the turnover of similar corrugated boxes is slightly low”. Similarly, the strong growth of Smurf Cappa is not the result of selling more cartons – its corrugated carton sales remained flat in the first nine months of 2022, and even fell by 3% in the third quarter. On the contrary, these giants increase their profits by increasing the price of their products. Baseball cap box
In addition, turnover does not seem to have improved. On the financial report conference call this month, Tony Smurf, CEO of Smurf Cappa, said: “The trading volume in the fourth quarter is very similar to what we saw in the third quarter. We usually expect to recover at Christmas. Of course, I think some markets such as Britain and Germany have performed mediocrely in the past two or three months.” Scarf box
This leads to a question: What will happen to the corrugated box industry in 2023? If the market and consumer demand for corrugated packaging starts to stabilize, can corrugated packaging manufacturers continue to increase prices to obtain higher profits? In view of the difficult macro background and weak carton shipments reported in the United States, analysts are pleased with the update of Smurf Cappa. At the same time, Smurfikapa stressed that “the comparison between the group and last year is extremely strong, and we always believe that this is an unsustainable level”. Christmas gift box
However, investors are very skeptical. Smurf Cappa’s share price was 25% lower than the peak of the epidemic, and Desma’s share price fell 31%. Who is right? Success depends not only on carton and cardboard sales. Jeffries’ analysts predicted that in view of weak macro demand, the price of recycled cardboard would fall, but they also emphasized that the cost of waste paper and energy is also falling, because it also means that the cost of packaging production is falling.
“In our view, what is often overlooked is that lower costs may have a huge driving effect on earnings. Finally, for corrugated box manufacturers, the benefits of cost reduction will appear before any potential lower carton price, which is more viscous in the process of decline (lag 3-6 months). In general, the earnings headwind from lower pricing is partially offset by the cost headwind of earnings.” Jeffries analysts said. Apparel box
At the same time, the demand problem itself is not completely straightforward. Although e-commerce and slowdown have posed a certain threat to the performance of corrugated packaging companies, the largest share of sales of these groups is often in other businesses. In Desma, about 80% of the income comes from fast moving consumer goods (FMCG), which are mainly products sold in supermarkets. About 70% of the carton packaging of Smurf Cappa is supplied to FMCG customers. With the development of the terminal market, this should prove to be flexible. Desma has noticed the good growth in plastic substitution and other fields.
Therefore, despite the fluctuations in demand, it is unlikely to fall below a certain point – especially considering the return of industrial customers who have been severely hit by the COVID-19 epidemic. This is supported by the recent performance of MacFarlane (MACF), which pointed out that the recovery of customers in the aviation, engineering and hotel industries offset the impact of the slowdown in online shopping, and the company’s revenue increased by 14% in the first six months of 2022. pet food delivery box
Corrugated packers also use the epidemic to improve their balance sheets. Tony Smoffey, CEO of Smoffey Kappa, emphasized that his company’s capital structure was “in the best state in our history”, and the debt/pre amortization profit multiple was less than 1.4 times. Miles Roberts, CEO of Desma, agreed with this in September, saying that the debt/pre amortization profit ratio of the group has dropped to 1.6 times, “which is one of the lowest ratios in many years”. shipping box
All these together mean that some analysts believe that the market has overreacted, especially in the case of FTSE 100 index packers, whose pricing fell as much as 20% from the generally expected pre amortization profit. Their valuation is certainly attractive. The forward P/E ratio of Desma is only 8.7, while the five-year average is 11.1, while the forward P/E ratio of Smurfikapa is 10.4, and the five-year average is 12.3. To a large extent, it depends on whether the company can convince investors that they can continue to have surprising performance in 2023. mailer shipping box
Post time: Dec-27-2022
