As we begin 2020, environmental, social and governance (ESG) and sustainability themes are at the forefront of investors’ minds as the worry surrounding climate change gained momentum throughout 2019.
Packaging is a major piece of the sustainable living lifestyle that we as consumers are striving to achieve. Therefore, how products are packaged has come under increasing scrutiny and endures a lot of negative publicity in relation to protecting the environment.
There is good reason for this, but packaging cannot be eradicated completely because it is necessary for transporting goods, protecting against disease and damage, and providing vital information such as product warnings or essential product labelling.
Two British companies involved in producing packaging are Mondi (LSE:MNDI) and Macfarlane Group (LSE:MACF).
9% share price rise in 2019
Mondi is over 50 years old and by far the biggest of the two as an international FTSE 100 company with a market capitalisation of £8.6bn. It has a price-to-earnings ratio (P/E) of 11 and earnings per share (EPS) of £1.62, and its dividend yield is an attractive 4%.
Mondi has manufacturing facilities throughout the world including Africa, Europe, Russia, and Asia and has been involved in paper making for over 200 years. It recognises the need for packaging solutions that are sustainable, reusable, or recyclable and is responding to that. It has made 16 public commitments to achieve by 2020, along with a carbon emission commitment running to 2030, plus a science-based 2050 target for production-related CO2 emissions intensity.
Earlier in December, it donated $50k to the UN Sustainable Development Goals (SDGs) One Young World competition to fund a new project in 2020 focussed on turning packaging waste into raw materials of value.
Mondi’s exposure to emerging markets could create long-term growth for the company but may put it at a disadvantage if there is a significant slowdown in the global economy.
Although its share price had a volatile time in 2019, it ended the year up 9%. In the four years from 2014 to 2018, its operating profit increased from €767m to €1,318m and it has a current profit margin of 12.5%.
45% share price rise in 2019
Macfarlane Group is headquartered in Glasgow and runs 3 leading UK-based businesses in the packaging and labels sector. It started 2019 with a share price of 75p and ended at almost £1.09, a rise of over 45% in the year. It has a trailing P/E of almost 19 and EPS of 5.7p, while its forward dividend yield is 2.18%.
Its main customer sectors include internet retail, aerospace, logistics, automotive, electronics, and fast moving consumer goods. The FTSE All-Share company has been listed on the main London Stock Exchange since 1973. It has a market cap of £169m, 900 employees and annual sales of £200m. Its customer base is 70% throughout the UK, 15% in Europe, and 15% in the US.
In the past couple of years, it has grown through acquisitions. In 2019, it acquired Ecopac and Leyland Packaging Company. It is also committed to improving its carbon footprint and in September launched its 100% plastic-free, biodegradable packaging protection for wine bottles. The product, called Flexi-Hex®, is made from recycled materials.
In its November trading update for the period from June 30 to October 31 sales revenue grew 4% and group profit before tax was ahead of the same period in 2018.
With the rise in e-commerce, demand for packaging is ever increasing. I think both companies look like good investments for 2020.
