The near-term impact from COVID-19 has been limited for the Paper and Packaging sector. Surges in food, medical and ecommerce demand have offset weakness in the more industrial exposed end markets leaving corrugated volumes growing at around 1-2% in Q1. However, as shown by the 10% drop in corrugated volume contraction in 2008-9, the sector is not immune to economic weakness.
There are several key challenges including whether the testliner price increases of €40-60/tonne for May succeed so soon after a €30/tonne testliner increase was achieved in March. As we have already seen in China, the testliner price increases implemented in that market reversed in a matter of weeks as the industry begun to normalise.
Supply remains an issue. European testliner capacity is set to grow by c3% pa over the next three years based on machines that are either on the cusp of starting up or have already started. This coupled with a challenging demand backdrop will put pressure on utilisation rates and pricing over the medium term.
Given the challenges outlined above we are pulling back our forecasts by 10-20% for the sector which implies yoy EBITDA declines of the same quantum for FY20. These are based on volume declines of 1-2%, a further €50/tonne containerboard price decline and c2% box price decline. As a result we maintain our Hold on SKG and Sell on DS Smith and we downgrade Mondi to a Hold.
To become more constructive on the sector we believe investors need confidence that FY20 will be a trough in earnings and more tangible evidence that the sector is successfully decoupling containerboard and corrugated box prices to reflect the value they provide to customers.