ii view: Smurfit shows confidence with another dividend

This packaging maker's customers include Heinz and Kellogg’s, while it also has exposure to e-commerce.

Nine-month trading update to 30 September 

• Revenue down 8% to €6.31 billion (£5.68 billion)
• Adjusted profit down 11% to €1.13 billion (£1.02 billion)
• Third quarter adjusted profit of €390 million
• Second interim dividend of 27.9-euro cents per share
• Total dividend year-to-date of €1.088 per share (98p)

Guidance:

• Expects to deliver full year adjusted profit between €1.46 billion and €1.48 billion

Chief executive Tony Smurfit said:

"I am pleased to report that the quality of our business and the strength of our people has produced an excellent performance in both the third quarter and the year-to-date. 

"We are increasingly excited by our future prospects and the structural growth drivers of our business including e‑commerce and sustainable packaging as well as our innovative ability to capitalise on these opportunities. Reflecting the Board's confidence in SKG's performance and prospects, it is recommending a second interim dividend of 27.9 cent per share.”

ii round-up:

Dublin headquartered paper and packaging maker Smurfit Kappa (LSE:SKG) reported improving third-quarter profit and another dividend payment as the impact of the pandemic eased and it gained confidence in the outlook. 

Adjusted quarterly profit of €390 million (£351 million) exceeded analyst estimates nearer to €340 million and was up on first and second-quarter totals of €380 million and €355 million. Another dividend payment of 27.9-euro cents per share adds to the 80.9-cents announced as of its July first-half results.

Smurfit shares rose by more than 3% in UK trading making for a year-to-date gain of around 10%. Shares for rival DS Smith (LSE:SMDS), which is around half the stock market value of Smurfit, and which only in September announced plans to restart dividend payments, are down just over 20%. 

Smurfit customers include Bosch, Kraft Heinz (NASDAQ:KHC), Kellogg (NYSE:K) and tissue maker Kimberly-Clark (NYSE:KMB). Given Covid hindered demand, full-year adjusted profit is now expected to come in at between €1.46 billion and €1.48 billion. Down from last year’s €1.65 billion.

The Irish cardboard maker pointed to recovering demand across both its European and American businesses. In 2019, Germany and France provided for its two biggest national markets generating around 14% and 12% of overall revenues respectively. Ireland accounted for less than 2%. 

Smurfit highlighted its exposure to accelerating trends in e-commerce, innovative packaging and increased consumer demand for sustainable packaging. Packaging accounts for the lions share of group products at just under 85% of annual turnover, with paper making up the balance. 

The total dividend year-to-date of €1.088 per share compares to the same planned - but part Covid withdrawn (80.9 cents) - payment for 2019.  

ii view:

Smurfit Kappa offers the chance to invest in a geographically diverse paper-based packaging company. Its product is renewable, recyclable and biodegradable. It supplies around 65,000 customers across more than 30 countries and owns approximately 67,000 hectares of forest globally. Along with manufacturing, it also offers recycling solutions to its customers, reprocessing over 6 million tonnes of recovered paper across the globe.

For investors, a still uncertain Covid outlook and an estimated forward price/earnings ratio above the three-year average – suggesting the shares are not exactly cheap – offer reasons for caution. But exposure to expected growth trends such as e-commerce and increasing consumer demand for sustainable packaging look to underpin long term prospects, while a dividend yield in the region of 3% is not to be dismissed in today’s ultra-low interest rate environment. In all, the long-term growth story for Latin America’s only large-scale pan‑regional player appears to remain intact. 

Positives: 

• Exposure to e-commerce and environmental trends
• Pursing a productivity improvement plan

Negatives:

• Full-year profits expected to be down on 2019
• Renewed lockdowns could again impact

The average rating of stock market analysts:

Strong buy