Packaging specialist Smurfit Kappa Group (LSE: SKG) has been busy this morning, announcing a new chair designate, a brace of acquisitions and continued steady growth in its latest trading statement.
Smurf’s up
The overall effect has been positive, with its update for the nine months to 30 September “delivering continued and significant year-on-year improvement,” including a 7% year on-year rise in group underlying revenue growth. Even more impressively, group pre-exceptional EBITDA grew 27% to €1.13bn, while margins grew 290 basis points to 16.9%.
Management said its full-year 2018 outcomes should be materially better than in 2017 as key performance measures show significant and continuing improvement. The share price is up 1.57% as a result, at time of writing.
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Kappa-bottomed
Group CEO Tony Smurfit said the group started the fourth quarter amid continued demand growth and further corrugated price recovery. “Smurfit Kappa continues to lead the industry, delivering innovative and value added packaging solutions for our customers,” he added.
The packaging industry has come under pressure lately, due to the growing outcry against waste, plastic and otherwise, but Smurfit claim this could be a benefit for the company as “demand for sustainable packaging solutions will only add to the existing strong secular drivers of corrugated use.” Although many analysts initially saw the war on packaging as a threat to the group, regulatory crackdowns can often benefit established players more than the upstarts, as they have deeper pockets and are able to stand the extra expense.
Strong
Today’s statement highlights “a very strong performance” with continued demand growth across most markets. The downside is higher energy, labour, logistics and other raw material costs, as well as a negative currency impact.
The £6bn FTSE 100 growth star remains on the acquisition trail, completing the €460m acquisition of Reparenco during the third quarter, and today announced an agreement to acquire a high quality integrated packaging operation in Serbia, which should continue to expand its geographic footprint.
Demand growth
Smurfit Kappa continues to deliver a very strong performance. The group said it has implemented commercial initiatives and has experienced continued demand growth across most markets.
This should help stem the recent slide in the share price which has seen the stock fall from 3292p to 2590p in the last two months, a drop of 21%. However, this reversal comes at the end of a strong expansion spurt, which saw net profit jump from €188m in 2013 to €417m last year.
Tidy little package
Some worry about the €2.87bn of debt Smurfit Kappa has piled up to fund its acquisition spree but today’s statement points to net debt-to-EBITDA of 2.1x, which isn’t excessive, and is down from 2.5x on 30 June 2017. A return on capital employed of 21.1% is also encouraging.
I had expected Smurfit Kappa to be cheaper after recent slippage but it trades at just over 15 times earnings, which isn’t exactly bargain territory. The forecast yield is a steady 3.7%, and although this is lower than some of today’s sky-high FTSE 100 yields, which can hit 9% in some cases, it looks safer with well-padded cover of 2.9. Wrap it up, I’ll take it.
