• H1 21A snapshot (y/y % chg.): Revenue -9%, EBIT -34% with margin compression of 300bps to 8.0%. ROCE down 310bps to 8.7%. EBITDA was adversely impacted by sales price/mix, specifically for Packaging. Encouragingly, organic FCF generation was up 16%. Dividends resumed (GBp 4/share) in line with their MT policy of 2-2.5x cover.  
  • H1 21A volumes -1% y/y; however, Q3 run rate is encouraging: Diverging trends continue with industrial in the red (but expect FY to be positive), while E-commerce is up 30% (from 13% to 17% of their non-industrial volumes). Q3 is making up for a tough H1, with volumes up 3.0% in October 5.7% in November.  
  • Southern Europe (43% of EBIT) hit the hardest: This is due to agricultural and tourist exposure but showing signs of improvement. Northern Europe saw strong organic box volume growth (UK, Nordics & Germany), while Benelux was under pressure. Eastern Europe volumes slightly under pressure due to higher Industrial exposure (vs. rest group); however, Poland continues to perform well.
  • North America (10% of EBIT) continues to gain momentum: Positive momentum in paper and box pricing continues in the US. Additionally, their greenfields Indiana box plant continues to ramp-up, helping to reduce their long paper position. They are expecting to reach >40% utilisation (50ktpa) by the end of FY 21e, and EBIT positive in H2.
  • COVID continues to accelerate structural growth drivers for corrugated: E-commerce is seeing a channel step-change with traditional stores accelerating online. 2020 UK internet retail sales now comprise 28% of total retail sales, comfortably above the 2019 average of 19%. Additionally, customers are prioritising security of supply, sustainability – all helping to drive customer consolidation of suppliers.
  • Gearing likely to benefit from non-core asset sales: This includes some of their containerboard capacity in central Europe, where they believe it will be easy to source in light of new capacity in Germany. Net debt was flat h/h and gearing (not the lowest amongst peers) is under control with net debt/BITDA at 2.37x (covenant of 3.75x). GBP 1.45bn of liquidity available and no significant refinancing until FY 23e.
  • Organic growth underpinned by e-commerce: New plants in Italy and Poland (GBP 100m) to meet increasing FMCG and e-commerce demand. Projects are advancing with land purchased, permits received, construction underway and expected to be operational in two years. Most of the capacity has been presold.
  • Outlook optimistic: Their base case appears conservative and assumes packaging volumes remain broadly flat h/h, with a slow recovery (low single digit growth) in 2021/22. They expect paper prices to stabilise in Europe and expect paper for recycling prices to reduce. DSS expects further momentum for volumes and margins to continue into H2, supported by the current paper pricing environment. DSS have realised a EUR 30/t containerboard price increase in December (40% of their clients are indexed deals). This is supported by tight stocks (“never been as tight as it is now”) and strong fibre demand. DSS ascribed the market tightness mainly from European demand, and to some extent increased demand from China. “They would not be surprised if there was another price increase in the new year”. With containerboard prices potentially EUR 90/t higher, box pricing is likely to gain momentum.

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