Market cosies up to Dunelm as dividend reinstated, and Smurfit Kappa benefits from boom in packaging demand

“The FTSE 100 seemed to be stuck in a state of suspended animation on Wednesday with the index surrendering early gains to trade flat,” says AJ Bell Investment Director Russ Mould.

“Its performance is being constrained by continuing gains for sterling which crimp the relative value of the overseas earnings which dominate the index.

“The pound’s strength reflects the UK’s strong progress on vaccine rollout, the Bank of England’s apparent retreat from the idea of negative interest rates and dollar weakness as traders eye the huge US stimulus package coming down the track.

“A better guide to investor sentiment, given this currency-related headwind, are the new records being set by US and Asian stocks as the Covid relief package planned by the Biden administration draws the focus away from a bleak winter to a potential spring and summer of recovery from the worst of the pandemic.

“Brent crude oil was steady at $60 per barrel after the strong run seen in recent days while gold remains stuck in the tight range it has seen for the last few months, up a little to $1,846 per ounce.”

Dunelm

“We’re not done sprucing up our homes in lockdown if the latest results from soft furnishings and homewares retailer Dunelm are any guide.

“A very strong balance sheet and the reinstatement of dividends means the market is cosying up to Dunelm as if it was one of the soft fleece throws it sells.

“Those fortunate enough to remain in employment have seen their living costs fall as they haven’t had to stomach outgoings like commuting and gym membership, and not being able to enjoy days out, so if we’re going to be stuck indoors making our environment as attractive and comfortable as possible is a big draw.

“What Dunelm has done extremely well in terms of capturing this redirected spend is significantly upping its digital game.

“To its credit this wasn’t a reactive move in the face of the pandemic. Under Nick Wilkinson, appointed as CEO in 2019, the company had already revamped its online strategy and invested in its website and the necessary infrastructure.

“This investment of money and management resources paid off in spades as the various lockdowns saw its physical stores shuttered.

“For it to be a retail winner is a genuinely impressive achievement when you consider it is neither a web-only operator nor does it operate in a sector which has been protected entirely from store closures. As well as enhancing its internet presence, Dunelm has also got basics like stock and cost control right.

“The disappearance of obvious competitors from the market, perhaps most notably department store chain Debenhams, could provide a further boost in terms of market share gains as society gradually reopens.”

Smurfit Kappa

“Few people would have predicted that cardboard would be one of the hottest properties in 2021, yet there is a shortage of the brown stuff which is pushing up prices, much to the delight of packaging groups like Smurfit Kappa.

“There are various reasons behind the shortage including stockpiling ahead of the Brexit deadline and disruption to the recycling supply chain.

“Boxes would normally be delivered to shops and then be collected efficiently, but more items are now going straight to consumers and a lot of packaging is now sitting idle in people’s garages or down the side of their house as the bin men refuse to take large boxes.

“On a global scale, Covid-related complications with shipping and staffing issues have also affected availability of packaging materials.

“As a supplier, Smurfit is in a sweet spot to take advantage of market tightness. It says prices and demand are picking up, suggesting a good year ahead for the business. Its 2020 results were ahead of expectations and shareholders will certainly like news of an 8% increase in the final dividend.

“The company is moving with the times with product innovation to capitalise on the accelerated shift to e-commerce. For example, it has developed a new range of packaging that helps to protect liquid products such as alcoholic drinks during transit.

“While it would seem as if Smurfit is very well placed, it must also deal with higher energy costs. These can be passed on to the customer through higher product prices which is fine but reduces the extra profit margin it could make during times of supply shortages. There is also an expectation for greater capacity to come online across the industry which could cap any big hike in selling prices.”

These articles are for information purposes only and are not a personal recommendation or advice.