1. UK Container & Packaging Market Landscape

Packaging helps in protecting a product, increasing its shelf life and also communicates a strong brand image. Apart from that, it offers convenience in transporting goods from one place to another. The packaging can be broadly classified under plastic packaging, paper packaging and engineered material packaging.

The global packaging industry is expected to grow by USD 280.29 billion between 2020 and 2024 as per Technavio report, and it would increase by close to 3.58% in 2020. As per Modor Intelligence report, the packaging market in the UK is expected to grow at a CAGR of around 3% between 2020 and 2025.

The demand for the packaging material improved in 2020 due to the surge in the e-commerce sales, healthcare products and food; however, the demand was offset by the subdued activity in the other end-markets. As the outdoor dining has been impacted, there has been a surge in the food packing and takeaway business. The global containerboard market is expected to grow at a CAGR of around 2.5% between 2020 and 2024, as per Numera Analytics. The packaging in the UK is strongly supported by the e-commerce sector sales, and internet sales stood at 26.6% of the total retail sales in August 2020. Meanwhile, the UK government has come up with a plastic packaging tax in March 2020 that would help in curbing the waste and promoting the usage of the recycled material.

Key Trends in Packaging Market

• Sustainable Packaging: It requires us to use limited resources in a better way with a minimal impact on the planet. Sustainability has become a priority for everyone, including environmentalists, consumers, and business. The packaging material made from fewer materials and recycle raw materials would be in huge demand.
• Digitalization: It is the new reality that helps in managing big data in the production networks that helps in staying connected and using e-commerce to buy packaging goods. Blockchain can help in addressing the problem of counterfeiting of products. It would create a strong security system.
• Smart Labels: It would help in determining the spoilage of product from touch or see. The label changes colour or becomes bumpy in texture every time a product is near expiration or expired. Food, pharmaceutical, cosmetics and FMCG are slated to have a need for smart labels on the packaging.
• Tracking of Packages: The RFID enabled packaging would help in tracing and tracking of packages. The growth in e-commerce and logistics has led to the importance of tracking and tracing of products. This would help in better security, improved compliances, data capture and higher productivity.
• Customized Promotion: Consumer personalization is growing with an increased demand for bespoke goods. There is also a need for customized packaging. The packaging would have more information about the product and its use, which would be more like a personalized assistant.

Growth Catalysts for Packaging Sector

• Brand owners and private labels would drive the growth for the packaging sector as the packing of the product communicates a brand's vision and its strength.
• E-commerce segment would be a demand driver as the online sales increase. Online orders need proper packaging for transportation to avoid breakage.
• Customer centricity would be important in making the packaging seamless, sustainable, and smart.
• The increasing population and growing economy would prop up the packaging sector as more goods would be purchased.
• Light weighting of the packaging products can save cost, and it would have a lesser environmental impact.
• Packaging made from the recycled products or that can be recycled with lesser environmental impact would be a channel for growth.

Risks Exposure on the Packaging Sector

• Regulatory Risk: Regulatory changes can impact how the packaging industry operates that can bring significant changes in production and demand.
• Raw Material Cost: The increase in raw material prices can impact the manufacturing cost of the final product.
• Supply Chain: Supply chain disruption can impact the production and the supply of finished goods.
• End-market: Any trouble in the end-market where the packaging product is used can immensely impact the packaging sector.

Regulatory Compliance for the Packaging Industry in the UK

The government and the regulatory bodies are driving the demand for sustainable packaging. The focus has now shifted from weight reduction in packaging material to low carbon emission packaging. The UK announced a plastic packaging tax in March 2020 that would be effective from April 2022. The new tax will be applied to the companies that produce plastic packaging and those who import in the UK. The tax would not be applied on any plastic material that has at least 30% of recycled plastic. The key reason for imposing the tax is for promoting the use of recycled material for making plastic packaging. The UK government is looking to imply a tax of £200 per tonne for packaging with less than 30% recycled plastic. The UK government has also in place the packaging producer charges that is based on the turnover and handling capacity of packaging material. As per wrap.org.uk, plastic usage is around 40% in the UK packaging industry, and the UK produces around 2.4 million tonnes per year of packaging waste, of which 1.7 million tonnes per year is from the household.

Benchmark Index Performance

The Container & Packaging Sector had a robust performance, as FTSE All-Share General Industrials index (with +2.3% return) has outperformed the FTSE-100 index (with -17.7% return) and the FTSE All-Share index (with -16.3% return) over the past 1-year. However, the FTSE AIM All-Share index performed better (with +10.1% return) than the FTSE All-Share General Industrials index.

SWOT Analysis 

Container & Packaging Sector Outlook

The value of the packaging sector is growing in quantum leaps, and there will be a closer partnership between brand owners, retailers, and upstream recyclers. The dynamics of the packaging industry is changing rapidly, and that is hugely driven by the way we shop and how goods are manufactured. The packaging industry would continue to grow due to the concerns of spoilage, authenticity, and origin of products.

As per markets and markets, the global industrial packaging market is expected to grow at a CAGR of around 4.3% between 2020 and 2025. The size of the market would grow from USD ~58.8 billion in 2020 to USD ~72.6 billion in 2025. The packaging market in the UK is expected to grow at a CAGR of around 3% between 2020 and 2025.

Covid-19 has posed new challenges for the packaging industry, but it has also opened the gate for new opportunities to reinforce the value of all packaging types. The nationwide lockdown in the UK from 23 March 2020 made people stay inside their home, and the majority of the meals were consumed in the household. This has underpinned the demand for packaging of these food items. The demand from online food ordering would continue to grow, and the same applies to online shopping.

The UK is likely to miss the EU target of 50% of household waste recycled or reused by 2020. For the last few years, the focus was on reducing the use of plastic, but the onset of the pandemic has exacerbated the situation. The annual waste in the UK is around 7.2 million tonnes that are worth close to £12.5 billion annually, and of all the waste products, the food constitutes the most.

The use of packaging is inseparable from our lives as even in the most challenging times, the first two lines of defence from covid-19 includes mask and sanitizer, and both use plastic. Smart packaging can also drive the growth as it could help in increasing the shelf life and make customers more informed about the product and lower the food waste.

2. Investment analysis and stocks under discussion (SMDS, MNDI, RBN, SKG)

After gaining insights on the Container & Packaging sector paradigm, we would look at the business model of four packaging players listed on the London Stock Exchange.

A. DS Smith PLC (LON: SMDS)

(Recommendation: Buy, Potential Upside: 26.58%, Market Capitalization: GBP 4.25 billion)

DS Smith is a UK based company that is engaged in the business of corrugated packaging and plastic packaging. The Company has an operation in 34 countries and employs close to 30,000 people. DS Smith is listed on the FTSE-100 index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of ~26.58% over the closing price of GBX 306.90 (as on 20 October 2020).

B. Mondi PLC (LON: MNDI)

(Recommendation: Buy, Potential Upside: 12.67%, Market Capitalization: GBP 7.82 billion)

Mondi is a UK based paper and packaging products company. It provides flexible packaging solutions, corrugated solutions, industrial bags, technical films, and eco-solutions. It has operations in around 30 countries. Mondi is listed on the FTSE-100 index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of ~12.67% over the closing price of GBX 1,602.50 (as on 20 October 2020).

C. Robinson PLC (LON: RBN)

(Recommendation: Speculative Buy, Potential Upside: 23.94%, Market Capitalization: GBP 21.43 million)

Robinson PLC is a UK based company that provides paperboard and plastic packaging. The plastic packaging division is focused on the food & beverage, personal care, and home care sector. The paper box division caters to sectors that include toiletries, confectionery, cosmetics, and mobile phones. Robinson is listed on the FTSE AIM All-Share index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of ~23.94% over the closing price of GBX 129.00 (as on 20 October 2020).       

D. Smurfit Kappa Group PLC (LON: SKG)

(Recommendation: Hold, Potential Upside: 8.97%, Market Capitalization: GBP 7.65 billion)

Smurfit Kappa Group PLC is a Dublin Ireland domiciled corrugated paper packaging material manufacturing company. The Company is a multinational company with operations in 35 countries, including 22 in Europe and 13 in the Americas. Smurfit Kappa is included in the FTSE-100 index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of ~8.97% over the closing price of GBX 3,188.00 (as on 20 October 2020).

*All forecasted data and peer information have been taken from Refinitiv, Thomson Reuters.

*The "Buy" or "Speculative Buy" recommendation is also valid for the current price as covered in the report as on 21 October 2020.

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