Jefferies says 'buy' DS Smith and Smurfit Kappa

Jefferies upgraded its ratings for DS Smith and Smurfit Kappa shares to 'buy' as the broker predicted positive trading for packaging companies helped by ecommerce and environmental pressures.

European containerboard and box companies have healthy order books and low inventory levels going into 2021, Jefferies said.

Tighter global inventory will support pricing in the first half of 2021 and new supply will be absorbed by underlying demand, modest industrial recovery in the second half and more exports to China, Jefferies said. As a result a bear case scenario for prices is unlikely, it added.

Jefferies increased its ratings on DS Smith and Smurfit Kappa from 'hold' with a £4.40 price target for DS Smith shares and a £39.50/€44 target for Smurfit Kappa. The broker kept Mondi as its top pick in the sector with a 'buy' recommendation and a £20.50 price target.

Ecommerce has been "supercharged" by Covid-19 as consumers in lockdown switched spending from travel and leisure to ordering more goods delivered in boxes to their homes, Jefferies analyst Cole Hathorn said. Business customers may also pay more for customised, more attractive packaging than brown boxes to present to consumers, he added.

The paper packaging sector will also gain over time from sustainability trends, including consumers turning away from plastic. There are many opportunities for plastic packaging to be replaced by paper and these will increase if governments use legislation or tax to encourage the switch, Hathorn said.

"Longer term, with ecommerce and sustainability tailwinds, in our view the packaging stocks should trade on higher through-the-cycle multiples'," Hathorn wrote in a note to clients.