ii view: demand improves at box maker Smurfit Kappa

Third-quarter trading update to 30 September

• Revenue down 19% to €2.69 billion (£2.34 billion)
• Adjusted profit (EBITDA) down 14% to €512 million (£445 million)
• Net debt up 1% year-over-year to €3.04 billion

Chief executive Tony Smurfit said:

“These results continue to demonstrate the effectiveness of our multi-year capital plans, our geographic footprint and the service and dedication of our people. SKG provides its customers with innovative and sustainable products, delivered and supported by the security of our integrated model.”

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ii round-up:

Smurfit Kappa Group (LSE:SKG) today detailed quarterly earnings broadly matching analyst forecasts, with the paper and packaging maker flagging hopes for full-year profit to be marginally ahead of current City forecasts. 

A one-fifth fall in third-quarter sales had adjusted profit down 14% year-over-year to €512 million, but with management now expecting annual profit to be around €20 million higher than before at €2.05 billion. 

Shares in the FTSE 100 company rose 2% in UK trading having come into this latest news down around a tenth year-to-date. That’s similar to rival DS Smith (LSE:SMDS) and versus a 2% fall for the FTSE 100 index.

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). 

Box demand in this latest quarter was about 2% behind 2022 levels versus a negative 7% and 5% in the first and second quarters respectively. Management expects the trend to continue, with Germany in particular showing improved order books.

In September, Smurfit announced plans to buy US packaging maker WestRock Co (NYSE:WRK) for around $11 billion. The deal aims to bring Smurfit’s strength in Europe and Latin America together with WestRock’s home US focus. Around $400 million of cost savings are to be targeted. 

Smurfit is likely to announce full-year 2023 results in early February. 

ii view:

Formed through the merger of Jefferson Smurfit and Kappa Packaging in 2005, the group is today a leading provider of paper-based packaging, employing over 45,000 people across 350 production sites in more than 35 countries. It is the largest corrugated packaging company in Europe with a market share of around 12% and is the only large-scale pan-regional player in Latin America.

For investors, the tough economic backdrop including heightened borrowing costs for both consumers and its corporate customers cannot be forgotten. Costs generally for businesses remain elevated, the potential price being paid for WestRock may in time look expensive, while reduced packaging hopes triggered by environmental concerns also warrant consideration. 

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On the upside, the successful acquisition of WestRock potentially strengths Smurfit's US position and offers sizeable cost savings. Diversity of both product and geography exists, exposure to likely growth trends in e-commerce and sustainable packaging are not to be ignored, while a forecast dividend yield of close to 5% is attractive.

On balance, and despite risks, a consensus analyst estimate of fair value at over £35 per share implies significant potential upside at a company that gives exposure to a strong investment theme.

Positives: 

• Exposure to e-commerce and environmental trends
• Attractive dividend (not guaranteed)

Negatives:

• Elevated costs
• Currency movements can impact

The average rating of stock market analysts:

Buy