Smurfit Kappa boxes clever

Smurfit Kappa (SKG) chief executive Tony Smurfit said there are “greater uncertainties than we have seen for some time” regarding the current operating environment, with companies having to negotiate rapidly rising costs, supply chain issues, ongoing Covid-19 disruptions and the fallout from the war in Ukraine.

The packaging group has some direct exposure to Russia itself, although this is fairly limited – equating to around 1 per cent of revenue and profit, or 3 per cent of net assets. It has appointed advisors to sell its Russian operations and although the process is still “in the early stages”, it hopes to complete a deal by the end of the year.

This proved a minimal distraction given its geographical spread and the company managed to widen margins on good revenue growth to report a 76 per cent increase in its half-year operating profit, to €839mn (£706mn).

Smurfit credited his company’s performance on past actions taken to ensure security of supply – it does everything from growing trees to recycling used paper – and investments made in sustainable packaging. During the half year, it launched a new range of sustainable, water-resistant packaging as well as a paper-based childproof box for detergent pods.

A working capital outflow of over €500mn was more than double the €195mn outflow in the same period last year, which was attributed to a “significant” increase in debtors, and to a lesser extent stock, as the prices it charged for board and paper rose. This was largely offset by a rise in creditors, given the higher energy and recovered fibre prices it is incurring.

Capital expenditure also doubled to €349mn, but despite the higher spending levels its return on capital employed jumped to 19.3 per cent, from 14.8 per cent a year earlier. The company also increased its half-year dividend by 8 per cent, which Smurfit said reflected the board’s confidence in its future prospects.

Investors are rightly concerned about the operating environment – Credit Suisse analysts cut their target price on the company’s shares ahead of the results, citing expected lower demand for cardboard.

But a 30 per cent decline in Smurfit Kappa’s share price so far this year means it now trades at a multiple of nine times forecast earnings, in line with peers but below its long-run average. We think this undervalues one of the stronger operators in its field, which has demonstrated its ability to maintain growth. Buy.

Last IC View: Buy, 3,271p, 5 May 2022