UK Paper & Packaging Firms Gain Shifting Outlook (MNDI, SMDS)

Barclays has made notable adjustments to its outlook on companies within the paper and packaging sector. Notably, the firm has upgraded DS Smith (LON: SMDS) to an “equal weight” status while downgrading Mondi (LON: MNDI) due to several market challenges.

Previous assessments of DS Smith by Barclays were marked by caution and despite the shift in price targets in differing directions, the net result stays broadly similar, price targets that are very close to current price action.

DS Smith receiving an improved rating and a target price set at 580p (increased from 435p). The driving force behind the upgrade is the impending acquisition by International Paper. Anticipations are high for this deal, which is expected to close in early 2025, as it promises DS Smith potential competitive advantages that the Barclays analysts now recognize.

The current price action of DS Smith's shares around 565 indicates the firm believe this one is close to fair pricing, and after a run of 84.62% on a year-to-date basis, analysts have struggled to keep pace.

On the other hand, Mondi has seen a downgrade to “underweight” from Barclays, with a new target price of 1150p, down from the previous mark of 1275p. This negative reflection is rooted in increased risks associated with the company's aggressive capital expenditure. The analysts at Barclays have expressed concerns regarding Mondi's ability to maintain its pricing power and margins amidst a decline in market demand.

Furthermore, Barclays highlights notable challenges for Mondi in terms of EBITDA performance. The bank remains sceptical about Mondi's capacity to achieve the expected returns from its recent investment ventures. Additional external risks cited for Mondi include the likelihood of heightened competition, and the company's considerable exposure to the struggling uncoated fine paper market.

Mondi's shares have had a contrasting year to DS Smith, with a decline of 28.95% on a YTD basis significantly underperforming the market. The current price action around 1,198.50 indicates further declines expected by Barclays based on the new target of 1,150.

Mondi's vulnerability in the market is seen as being exacerbated by the ongoing trends toward digitalization. As the global demand for traditional paper diminishes in favour of digital alternatives, Mondi's market positioning becomes increasingly precarious. This shift has prompted analysts to take a more reserved stance regarding Mondi's future prospects.

Barclays' latest assessments of DS Smith and Mondi reveal contrasting potentials within the paper and packaging industry. DS Smith appears poised for a future competitive edge, while Mondi faces a confluence of risks that may impact its performance negatively.