Smurfit Kappa plots box price increases as earnings dip 1%

Group has ‘flexibility’ to carry out €1bn of deals, says chief executive

Smurfit Kappa’s shares rose on Friday as the paper packaging group’s first-quarter earnings beat market expectations and it vowed to focus on increasing cardboard box prices for the remainder of 2017 to recover soaring input costs.

Shares in the company rose as much as 1.7 per cent in London to give it a market value of over €6 billion, with analysts concluding that its European business was particularly strong in the period as Latin America disappointed.

While Smurfit Kappa earnings before interest, tax, depreciation and amortisation (ebitda) dipped by 1 per cent in the first three months of the year to €278 million as it grappled with the rising of cost of recycled cardboard used to make new boxes, the result was €6 million ahead of what analysts, on average, had expected. Revenue rose 6 per cent to €2.13 billion.

"These results, against the backdrop of significant recovered fibre cost inflation of approximately €30 million year-on-year, reflect the continued strength of our business," Tony Smurfit, group chief executive, said in a trading update published on Friday before Smurfit Kappa's annual general meeting in Dublin. "We expect improved margins as paper price increases translate into higher box prices."

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Containerboard

Smurfit Kappa and other packaging companies have been increasing the cost of recycled containerboard, which is used to make cardboard boxes, in recent time. The focus has now switched to raising prices of the end product. Speaking to The Irish Times after the agm, Mr Smurfit said that while the company may increase box prices in the current quarter, "I think it is more of a second-half event".

Overall box volumes rose 4 per cent in Europe during the first quarter, helped by “solid demand in most markets” and additional working days in the period as Easter occurred later this year. In the Americas volumes grew 3 per cent, excluding Venezuela where the economy continues to deteriorate.

Smurfit Kappa sees European box volume growth easing back to 2 per cent for the year as a whole.

David O’Brien, an analyst with Goodbody Stockbrokers in Dublin, said the group’s 2 per cent ebtida growth in the first quarter in Europe, to €213 million, was “strongly ahead” of his forecast as the volume of sales grew apace.

However, the group’s €74 million ebitda for the period in the Americas, marking a 9 per cent slump on the year, was well below Goodbody’s €89 million estimate, as a result of higher-than-expected raw material costs and “challenging” conditions in Venezuela and Argentina.

Earnings forecasts

Davy analyst Barry Dixon said there was potential for analysts to start upgrading their earnings forecasts for Smurfit Kappa as cardboard box prices come through.

The current consensus among analysts that cover the company is that its adjusted ebitda will increase by about 4 per cent this year to €1.264 billion.

Meanwhile, Mr Smurfit said the pipeline of potential acquisitions was “filling up” again after the company spend last year integrating two Brazilian paper product producers acquired in late 2015 for €186 million.

“There’s certainly plenty of smaller opportunities and one or two larger ones in Europe and the Americas,” Mr Smurfit said, adding that the group had the financial flexibility to spend €1 billion on deals “without really busting through” its covenants with lenders. “That’s not to say we’d do €1 billion. It’s about being prudent.”

Separately, Smurfit Kappa non-executive directors Thomas Brodin and Gary McGann, the group’s former chief executive, retired from the board following the conclusion of the agm.

Joe Brennan

Joe Brennan

Joe Brennan is Markets Correspondent of The Irish Times