Smurfit Kappa profits from e-commerce boom

The near-term future of paper and packaging company Smurfit Kappa (SKT) is largely dependent on two factors: cost inflation and the continued boom of e-commerce. In May, the United Nations Conference on Trade and Development published a report estimating that online retail’s share of total retail jumped from 16 per cent to 18 per cent in 2020. This trend contributed to Smurfit’s 11 per cent revenue increase. However, rising costs of raw materials and energy meant its cash profit margin was down 80-basis points to 16.7 per cent. The question for investors is: which of these forces will outlast the other?

Smurfit is surely confident that e-commerce will continue on its upward trajectory, even it is at a slightly slower rate than the past year, as shown by its agreement to acquire Verzuolo, a recycled containerboard business in Northern Italy for €360m (£308m). It is expected this acquisition will be complete in the fourth quarter and will increase the companies corrugated capacity, which is where packaging revenue is mainly derived from. Corrugated saw a 10 per cent increase compared with 2020.

For the pessimists, there are a few numbers to keep an eye on. As with Unilever's and Reckitt Benckiser’s recent results, rising costs have lowered the packager's cash profit margin. On top of this, a significant increase in the amount of debtors has contributed to a drop in its free cash flow to €117m in HY 2021, from €238m at the 2020 half-year mark.

Smurfit, though, seems confident it will be able to pass on costs through higher prices in its corrugated business and has not seen any significant extension of debtor days in this period. But a forward rating of 22 times consensus earnings (according to FactSet), though hardly prohibitive, suggests the market has taken account of the group's trading prospects. Hold. 

Last IC View: Hold, 2,620p, 29 Jul 2020