ii view: bigger profits on the cards for packager Smurfit Kappa

Shares for this sustainable packaging maker are down by more than a quarter year-to-date and now offer a forecast dividend yield of around 4%. Buy, sell, or hold?

Nine-month trading update to 30 September 2022

• Revenue up 33% to €9.72 billion (£8.34 billion)
• Adjusted profit (EBITDA) up 43% to €1.77 billion (£1.52 billion)

Chief executive Tony Smurfit said:

“SKG has delivered a very strong performance in the first nine months. Our results reflect the steps we have taken and the quality of the Smurfit Kappa business.”

ii round-up:

Dublin headquartered paper and packaging maker Smurfit Kappa Group (LSE:SKG) today detailed double-digit gains in both sales and profit, as it flagged expectations for full-year adjusted profit to rise by 33% to €2.3 billion. 

That’s ahead of City forecasts for nearer to €2.2 billion and comes as sales for the nine months to the end of September rose by a third to €9.72 billion, aided by product price rises made to counter rising costs. Adjusted profit for the period climbed 43% to €1.77 billion. 

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Shares in the maker of items including paper-based fruit punnets retreated by around 2% in UK trading having come into this latest announcement down by almost 30% year-to-date. Rivals Mondi (LSE:MNDI) and Smith (DS) (LSE:SMDS) are down by a fifth and a quarter respectively in 2022, while the FTSE All Share index has fallen by close to 7%.  

Smurfit’s paper-based packaging is sold to customers including Procter & Gamble Co (NYSE:PG), Unilever (LSE:ULVR), Nestle SA (SIX:NESN) and tissue maker Kimberly-Clark Corp (NYSE:KMB). 

The adjusted profit margin for the FTSE 100 company improved to 18.2% from 17% a year ago as investments made over recent years continued to improve efficiency. Group net debt climbed 17% year-over-year to €3 billion, although as a ratio of adjusted profit fell to 1.4 times from 1.6 times. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares following the results. Last month, Smurfit replaced rival DS Smith as the broker’s top pick in the sector. 

Full-year results to the end of December are likely to be announced in February. 

ii view:

Formed by the merger of Jefferson Smurfit and Kappa Packaging, the company today is a major maker of both paper and paper-based packaging. Employing over 45,000 people, packaging generates by far its biggest slug of sales at around 85% with paper the balance. It supplies customers across more than 35 countries with sales across Europe accounting for just under two-thirds of total revenues. 

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For investors, a highly uncertain economic outlook including rising interest rates and a cost-of-living crisis cannot be ignored. Elevated costs such as energy continue to warrant consideration, as does broad demand for reduced packaging under environmental concerns. 

More favourably, diversity in both product and geographical terms should not be overlooked. Exposure to likely growth trends in e-commerce and more sustainable packaging also need to be remembered. So does a record of more than five years of consecutive dividend growth. 

On balance, and with the shares currently sat on an estimated future dividend yield of just over 4%, income investors will be happy. 

Positives: 

• Exposure to e-commerce and environmental trends
• Geographical diversity

Negatives:

• Elevated input costs
• Currency movements can impact

The average rating of stock market analysts:

Strong buy