Smurfit Kappa boosts profits despite fall in demand

Packaging giant Smurfit Kappa (SKG) has managed to grow its profits by almost 40 per cent, despite a fall in demand for cardboard boxes. 

In results for the year to 31 December 2022, the FTSE 100 company reported a 27 per cent rise in revenue and a 38 per cent jump in earnings before interest, tax, depreciation and amortisation (Ebitda). Box volumes dipped by 2 per cent, however, with the UK and Germany performing below expectations. Growth was instead driven by “progressive box price increases”, which coincided with easing cost pressures. 

The big question, though, is whether Smurfit Kappa will soon have to drop its prices. Management noted a slowdown in demand in 2022, “especially in the month of December, where we saw stock reductions and downtime taken by customers”. Investors are getting jittery that this slowdown – combined with falling input costs – will mean that the packager is forced to charge less for its products, and that growth will stall.

This is already starting to unfold. Management said the price of testliner paper – having increased by €100 per tonne (£89) in the first half of the year – reduced by €160 per tonne between June and January. Similarly, the price of kraftliner – having risen by €60 per tonne in the first half of the year – fell by €120 per tonne between September and January.

Yet Smurfit Kappa still looks robust. For starters, it has huge scale and serves a diverse range of customers and end markets. Moreover, analysts at Jefferies argued that box prices tend to be stickier on the way down, meaning that packagers could reap the rewards of lower input costs before they are forced to drop their prices. This could see it through the worst of the turbulence. Buy. 

Last IC View: Buy, 2,836p, 27 July 2022