Smurfit Kappa PLC (LON:SKG) is now an ‘overweight’ for JP Morgan after the investment bank initiated coverage on the stock.
Analysts set the FTSE 100 firm’s target price at 4,147p while also upping the one of its competitor DS Smith PLC (LON:SMDS), also deemed an ‘overweight’ stock, to 486p from 452p.
READ: Smurfit Kappa ups dividend after underlying earnings beat expectations
The two packaging companies have “more similarities than differences”, the bank said, with multiple short- and long-term positives for both and tailwinds getting stronger over the past 12 months.
The most important driver of profit from one year to the next is the price of boxes, with 1% of change adding 7% to underlying earnings (EBIT) and demand growth rising by 6% in the fourth quarter.
Box prices are linked to paper prices, which are determined by supply and demand, and box volumes are seen as the structural driver in the longer term.
Paper prices are also recovering, which should translate into higher box prices from the second quarter onwards, according to JP Morgan.
Both groups benefit from e-commerce, accounting for around 15% of volume, and corrugated boxes are seen as a more sustainable alternative to plastic packaging.
Analysts anticipate the conversion of plastic to paper to add around 40% to the European containerboard market.
Shares in Smurfit Kappa shed 2% to 3,430p while DS Smith lost 1% to 371.4p on Tuesday at noon.