ii view: packages giant Smurfit Kappa wraps up solid third quarter

Exposure to recycling and e-commerce trends, with a dividend yield of around 2.5%. Buy, sell or hold?

Nine-month trading update to 30 September

• Revenue up 15% to €7.29 billion (£6.19 billion)
• Adjusted profit (EBITDA) up 10% to €1.24 billion (£1.05 billion)
• Third quarter EBITDA rose 16% to €454 million

Guidance:

• Expects to deliver significant full-year EBITDA growth in line with current market expectations

Chief executive Tony Smurfit said:

“To meet growing customer demand, in the first nine months of the year, we approved approximately €600 million in projects across the Group. Reflecting our continuing focus on sustainability was the recent launch of our Green Finance Framework and issuance of green bonds of €500 million. 

“We expect to deliver significant EBITDA growth for the full year in line with current market expectations. With the many growth opportunities and the significant ongoing investment in our business, we are excited about our future prospects.”

ii round-up:

Dublin headquartered paper and packaging maker Smurfit Kappa (LSE:SKG) today reported double-digit growth in both revenue and profit as customer demand remained robust and product price increases helped offset rising costs. 

Revenue for the nine months to the end of September rose 15% to €7.29 billion (£6.19 billion), given corrugated volume growth of 9% in Europe and 11% in the Americas versus 2020. Adjusted profit, or EBITDA rose 10% to €1.24 billion (£1.05 billion).

Shares for the maker of items including paper-based fruit punnets were little changed in UK trading, having about doubled since pandemic lows back in March 2020. Shares for rivals Mondi (LSE:MNDI) and DS Smith (LSE:SMDS) are up by around 53% and 42% respectively during that time. 

Smurfit customers include Bosch, Kraft Heinz Co (NASDAQ:KHC), Kellogg (NYSE:K) and tissue maker Kimberly-Clark (NYSE:KMB). Broker UBS highlighted that recent strong earnings from rivals had likely already been anticipated at Smurfit. 

Third-quarter EBITDA rose 16% year-over-year to €454 million, up from €395 million in the second quarter. 

Smurfit highlighted that materially higher input costs, principally, but not limited to, recovered fibre and energy are being progressively recovered through corrugated box price increases.

Looking forward, management noted that its integrated paper and corrugated system is effectively sold out. 

It has now completed its recent purchase of the Verzuolo mill in Northern Italy bringing 600,000 tonnes of recycled containerboard manufacturing capacity on board. It also recently approved two major paper projects in both Germany and Mexico. 

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

ii view:

Smurfit Kappa is a geographically diverse paper-based packaging company. Employing over 45,000 people, its sales are split roughly 85% in packaging and the balance in paper. It supplies customers across more than 35 countries and owns around 68,000 hectares of forest globally. Along with manufacturing, it also offers recycling solutions to customers, reprocessing over six million tonnes of recovered paper across the globe.

For investors, rising input costs both from cardboard fit to recycle and energy prices offer some caution. An estimated forward price/earnings ratio above the three-year average also suggests the shares are not obviously cheap, while currency movements can affect the numbers given sales in regions such as Latin America. 

On the upside, exposure to expected growth trends such as e-commerce and increasing consumer demand for sustainable packaging look to underpin long-term prospects. A historic and forecast dividend yield in the region of 2.5% is also not to be ignored in today’s ultra-low interest rate environment. In all, and with the consensus analyst estimate of fair value currently stood at £46.23 per share, long-term momentum looks to remain in favour of the shares. 

Positives: 

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

Negatives:

• Renewed lockdowns could again impact
• Rising input energy prices

The average rating of stock market analysts:

Strong buy