I. Sector Landscape and Outlook

Packaging is an integrated process of planning, creating, manufacturing, wrapping, boxing, or bottling of products for end-users such as consumer, industrial, and defence markets. Within the packaging sector, paper and board or rigid plastics are the most common types of packaging materials. The industry is expected to report solid growth in the next decade supported by specialised engineers who can crack specific problems in the packaging space and deliver more efficient environment-friendly packaging solution to a varied number of industries.
 

UK packaging sector has been deemed as an essential business amid COVID-19 pandemic, and it is uniquely positioned to continue to service their clientele amid the challenging environment. The UK packaging industry has a critical role in the fight against the novel virus spread, as without packaging many crucial supply chains including food, sanitation products, pharmaceutical products and medical devices would not have been delivered. During the COVID-19 pandemic, packaging companies witnessed a higher demand from e-commerce, food, personal care and hygiene, medical and equipment segments. At the same time, a slowdown was noticed from the industrial segment like automobile, building materials, and other industrial goods.

As per the Packaging Federation of UK, the UK Packaging industry had an annual turnover of about £11 billion in 2019 and employed 85,000 workforces in the sector, which implies 3% of the total UK manufacturing workforce. According to markets and markets research, the global packaging industry is expected to grow from US$ 909.2 billion in 2019 to US$ 1,012.6 billion by 2021, which implies a compounded average growth rate of 5.5%.

Global packaging market expected growth rate (2019-2021)


Source: Markets and Markets

Key Trends

1. Booming E-commerce Shopping Everywhere: The consumer shift to online retail is likely to have a substantial impact on packaging needs. Globally, consumers are turning more digital-savvy; therefore, e-consumer packaging must fulfil new and diverse needs. There is a higher scope to optimize the overall packaging landscape for the last mile delivery to increase customer’s unboxing experience. Corrugated packaging is already benefiting from the changing landscape in e-commerce, which has increased demand for secondary protective packaging. Ecommerce going to be a major trend for the global packaging sector in the next decade. According to the latest data revealed by the Office for National Statistics (ONS), internet sales as a percentage of total retail sales in the UK surged to 30% in April 2020 from 22% in March 2020, and on a YoY basis, internet sales as a percentage to total retail sales leapt up from 18.4% to 30%.

 
Figure 2: Internet sales as a percentage of total retail sales


Source: ONS
 

2. Shift Towards Sustainable Packaging: Heightening pressure to diminish packaging waste has increased sharply across the world, and therefore regulators and corporation have acted in the same direction. Especially fast-moving consumer goods (FMCG) manufacturers and retailers are witnessing humongous pressure with regards to the uses of plastics packaging choices. Many consumers have claimed that they are highly concerned about the environment, with the highest rates registered in emerging economies and state government across the world are coming up with new legislation to curb the use of plastic packaging and increase recycling. Also, several European countries and Asian countries are started putting bans on single-use plastics. For Instance, the European Union is targeting for plastic beverage bottle recycling at 90 per cent by 2029 across member countries. Further, changing consumer's behaviour towards sustainable packaging is benefiting paper and board packaging. Also, the tremendous persuade from consumers, regulators, and the industry itself pushed companies to move toward more sustainable packaging solutions.

 
Fig 3: Google trends on “plastic waste”

Source: Mckinsey
 

3. Shift in Consumer Preferences: The increase in consumer convenience in packaging is not new, it has been pushing innovation and multiple substrates shifts over the past decade. And moving forward, the industry expects the consumer to continue to demand an increasingly effortless and less time-consuming consumption experience.
 
4. Increasing Digitalisation Trend in Packaging Sector: In the next decade digitalization in packaging, which implies technology integration and employment to novel technologies will mainly be aimed to enhance customer value and exploring new business areas. This offers a wide range of growth catalysts in the packaging industry. In the next decade, solutions that integrate digital technology into packaging substrates will likely change the way consumers interact with packaging. Here, digital devices can add value to consumers by boosting packaging's power as a platform for information and brand messaging.
 

Outlook
The outlook for the packaging sector remains strong despite the increased push for packaging waste in general and single-use-plastics specifically. Further, the demand for corrugated packaging enhancing rapidly, driven by an increase in the trend of e-commerce globally and rapidly expanding internet sales footprints. The corrugated segment is expanding at a higher speed than expected; a shift towards sustainable packaging is also a reason behind fast growth in the corrugated packaging. In the near to medium term, the industry is likely to witness a robust demand from essentials segment as the people are following social distancing measures and opting for online/eCommerce mode for their purchases. Further, governments across the globe are announcing easing in lockdown restrictions, as a result retail stores, other business and industrial activities are expected to resume to normal in a phased manner. Once the industrial activities resume to normal, demand from non-essential segments such as automobiles, retail, manufacturing etc., would restore.
 

UK Packaging Sector Companies' Response to COVID-19 pandemic

Large-cap packaging companies like Smurfit Kappa Plc, DS Smith Plc and Mondi Plc have cancelled dividend payments in response to the novel COVID-19 pandemic, even though all of them are cash-rich and among the most cash-generative companies amid this challenging period. The board of all three leading packaging players felt that it is prudent to hold cash strengthen balance sheet so that they can handle efficiently if any short-term challenges invoke.
II. Investment theme and stocks under Discussion (MNDI, SMDS, SKG and MACF)

After understanding the recent trends in the packaging industry, let’s now look at the four players from the industry those are listed on the London Stock Exchange. To assess the same, companies’ stocks are evaluated based on Discounted Cash Flow (DCF).

Fig 4: Relative performance of the stocks under discussion against FTSE 100 (YTD)