Brazilian businesses outperforming market, says Tony Smurfit

Smurfit Kappa chief executive Tony Smurfit has said the cardboard box-maker's foray last year into the Brazilian market is already paying off, even as the country is gripped by political and economic turmoil.

The group spent €186 million in December on two Brazilian paper-based packaging businesses as the region’s largest economy was in the midst of its worst crisis since the 1930s.

This is against the backdrop of a protracted political struggle set to come to a head next week as Brazil's senate votes on whether to remove President Dilma Rousseff from office and have her put on on trial over claims of budgetary manipulation.

“Once the current impasse is out of the way and [things have] had a little bit of time to settle down, we believe the outlook over the longer term is very good,” Mr Smurfit told reporters after Smurfit Kappa’s annual general meeting in Dublin yesterday.

He said the purchased businesses – bought at a price of about six times operating earnings as the wider industry trades at almost eight times – have been “outperforming the market by a significant margin”.

Right attributes

“We actually have been looking at

Brazil

since 1986 and we’ve never been able to find companies that fit us, that have all the right attributes [before now],” he said.

Mr Smurfit said Smurfit Kappa, which spent €380 million on acquisitions last year, can afford to spend as much as €400 million a year on deals without denting its balance sheet. He signalled the group would be most interested in purchases in the United States, although valuations in that market are looking a bit “stretched” at the moment.

The most recent deals helped Smurfit Kappa deliver 6 per cent growth in earnings before interest, tax, depreciation and amortisation (ebitda) in the first quarter, to €281 million, the group said yesterday.

“Ebitda growth was driven by an improved operating performance and the positive impact of acquisitions completed in 2015,” Mr Smurfit said. “We continue to see good levels of demand for packaging across almost all the markets in which we operate.”

The company is also comfortable with analysts’ full-year ebitda forecasts, which call for 6-10 per cent ebitda growth to between €1.25 billion and €1.3 billion, Mr Smurfit said.

In the first quarter, revenue rose 2 per cent to €2 billion, the company said in a statement before its annual general meeting in Dublin yesterday.

Price increase

Smurfit Kappa, which is expected to join the UK’s FTSE 250 index after moving its premium listing to London this year, recently announced a price increase on a class of containerboard used for cardboard boxes, known as kraftliner. The move surprised analysts, including Barry Dixon at Davy, given that the industry had been dogged by price weakness in late 2015 and early 2016.

Net debt at the group fell to €3.03 billion at the end of March from €3.05 billion in December. Smurfit Kappa sees its debt level falling from 2.5 times ebitda to fall over the course of the year as recent acquisitions boost earnings and cash flow.

In Europe, Smurfit Kappa’s underlying cardboard box sales volumes rose 2 per cent. Volumes in the Americas rose 26 per cent, driven by the acquisitions.