Demand is picking up at Smurfit Kappa

Smurfit Kappa’s (SKG) share price jumped by 6 per cent in the aftermath of its full-year results. This was slightly counterintuitive. The FTSE 100 packager saw revenue fall by 12 per cent to €11.3bn (£9.6bn) in 2023 and adjusted operating profit declined by 16 per cent to €1.4bn in the same period. Management blamed this on a “difficult” demand environment, characterised by destocking and a lack of economic activity in certain sectors, particularly durable goods. Lower demand caused box volumes to dip and – more importantly – prices to tumble. 

However, there were plenty of green shoots in the report. Box volumes in both Europe and America improved over the course of the year, with each quarter showing sequential increases in demand. In Europe, box volumes in the fourth quarter of 2023 were flat compared to 2022, while in the US they were up by 1.6 per cent.

Profit margins also held steady – indeed, the group’s adjusted Ebitda margin crept up from 18.4 per cent to 18.5 per cent. This is because lower box volumes and lower average box prices were offset by cheaper recovered fibre and lower energy bills.

Change is now in the air. In September, Smurfit Kappa announced an agreement to merge with US packaging giant WestRock to form Smurfit WestRock, which is due to be listed in New York and have a secondary listing in the UK. The deal has yet to be finalised, but management is “increasingly excited about the potential this combination presents”. For investors, though, it breeds uncertainty: mega-mergers are not guaranteed to succeed. 

The worst does seem to be over for Smurfit Kappa and its peers, however, and the group has shown admirable resilience against a tough backdrop. Smurfit Kappa is clearly feeling upbeat, having upped its final dividend by 10 per cent to 118.4 cent per share. Buy.

Last IC View: Buy, 3,048p, 2 Aug 2023