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Smurfit Kappa weathers cost storm

Packaging company has benefited from ecommerce boom, but cost of sales is rising fast
Smurfit Kappa weathers cost storm
  • Profit margins dip by 1 per cent
  • Market expected to remain tight 

Heavy industry is under strain as energy and raw materials grow ever more expensive. The packaging sector is no exception, and Smurfit Kappa (SKG) refers to “unprecedented cost inflation” in its latest financial results. Recovered fibre – which is used to make recycled paper – is proving particularly pricey.

Despite these pressures, Smurfit Kappa has reported strong sales profit growth and only a slight dip in its Ebitda margin, from 17.7 per cent to 16.8 per cent. The packaging group said it has tackled elevated costs by increasing the price of its boxes. It also cited strong box volumes and security of supply. 

The latter is particularly important given the tightness of the market, which is expected to continue. Demand for packaging soared during the pandemic as shoppers turned to ecommerce, and mills have struggled to keep up. In October, however, Smurfit Kappa bought a recycled containerboard mill in Italy with a capacity of 600,000 tonnes, which should bolster security of supply – albeit at a cost of €360mn (£303mn).

The question for packagers is whether they can keep upping their prices to protect margins? Smurfit Kappa said it expects to recover its extra costs, with margin improvement, throughout 2022. However, as high streets come back to life, shoppers might start to baulk at the cost of deliveries and return to physical stores.

Trade receivables must also be monitored. While management said there was no “significant deterioration” in debtor days in 2021, trade receivables are up almost 40 per cent year on year, compared with a 18 per cent rise in revenue. An increase in debtors and stock translated into a working capital outflow of €114mn in 2021, compared with an inflow of €94mn in 2020. Hold.

Last IC View: Hold, 4,121p, 28 July 2021

SMURFIT KAPPA (SKG)   
ORD PRICE:4,049pMARKET VALUE:£10.5bn
TOUCH:4,046-4,051p12-MONTH HIGH:4,305pLOW: 3,318p
DIVIDEND YIELD:2%PE RATIO:18
NET ASSET VALUE:1,690¢*NET DEBT:67%
Year to 31 DecTurnover (€bn)Pre-tax profit (€mn)Earnings per share (¢)Dividend per share (¢)
20178.5657617787.6
20188.95-404-27472.2
20199.0567720280.9
20208.5374822887.4
202110.1191326496.1
% change+18+22+16+10
Ex-div:7 Apr   
Payment:6 May   
£1=€1.19 *Includes intangible assets of €2.72bn, or 1,050¢ a share