Barclays upgrades DS Smith on IP deal, downgrades Mondi over market risks

Investing.com -- Barclays (LON:BARC ) in a note dated Monday (NASDAQ:MNDY ) adjusted its outlook on DS Smith (LON:SMDS ) and Mondi (LON:MNDI ), reflecting diverging prospects within the paper and packaging sector. 

DS Smith received an upgrade to “equal weight” with a target price of 580p, while Mondi was downgraded to “underweight” with a target price of 1150p.

The upgrade for DS Smith follows its pending deal by International Paper, anticipated to close in early 2025. 

Barclays noted that this acquisition could provide DS Smith with competitive advantages through expanded production capabilities, improved economies of scale, and operational synergies with IP. 

Previously, Barclays had a cautious stance on DS Smith, given the stock’s significant gains this year after multiple acquisition bids. 

Barclays now sees potential upside if the pro forma DS Smith-IP company re-rates on a higher valuation multiple. 

However, given DS Smith’s current high valuation, the “equal weight” rating reflects limited near-term appreciation while underscoring the longer-term potential of the IP acquisition.

In contrast, Mondi’s downgrade reflects increased risks tied to its aggressive capital expenditure, which Barclays views as vulnerable in a market facing declining European containerboard demand and capacity utilization. 

With €1.2 billion committed to expanding production, Mondi has sought to drive growth but may face difficulties maintaining pricing power and margins if demand doesn’t absorb this added capacity. 

Barclays’ projections for Mondi’s EBITDA are notably below consensus, citing challenges in achieving anticipated returns from recent investments as the industry contends with softening prices.

Barclays also cited external risks for Mondi, including the potential for an increase in competition from Russian suppliers if the Russia-Ukraine conflict ends, potentially lowering prices across Europe. 

Additionally, Mondi’s exposure to the declining uncoated fine paper market—20% of its EBITDA—adds to its vulnerability amid digitalization trends that reduce paper demand.

Source: Investing.com