Profits slip at Smurfit Kappa

Packaging companies are contending with weaker demand and a fall in the price of cardboard, after a period of bumper profit growth. Against this difficult backdrop, however, Smurfit Kappa (SKG) is holding up fairly well. 

The Dublin-based company saw volumes slip by 6 per cent in the first half of 2023, and revenue fell by 7 per cent on an underlying basis. However, it managed to nudge up its Ebitda margin from 18.4 per cent to 19.1 per cent, meaning cash profits only declined by 5 per cent to €1.1bn (£946mn). Management attributed this to the strength of the company’s integrated model, as well as to the “value-adding solutions we provide to our resilient customer base”.

This certainly was impressive, given that testliner prices were €200 per tonne lower in the period, while kraftliner was down €172 per tonne.

Packagers are fundamentally cyclical, however, with limited means of stimulating demand. If the current economic climate deteriorates, Smurfit Kappa and its peers will be under pressure - not least because the industry could end up with a surplus of boxes.

However, management said it had seen “encouraging signs of improvement”. In Europe, for example, shipments per day are up on the previous three quarters. Smurfit Kappa also has the advantage of an enormous global footprint, with over 350 production sites in 36 countries worldwide. While most of its earnings are generated in Europe, around a quarter of profit is made in the Americas, and the company is the only large-scale, pan-regional player in Latin America. This means it isn’t overly exposed to the fortunes of one economy. 

It’s unlikely that packagers are out of the woods yet - the second half of 2023 could prove challenging. However, we remain impressed by Smurfit Kappa’s core business and position in the market. And we don’t think a consensus forward price-to-earnings ratio of 11.4, according to FactSet, is unreasonably high for investors with a long-term view. Buy.

Last IC view: Buy, 3,449p, 08 Feb 2023