Smurfit Kappa ‘no sitting duck’ despite depressed value

Smurfit Kappa’s chief executive said the company is “far from being a sitting duck” even as it trades at a significant discount to peers and a stronger dollar has made European companies more attractive as takeover targets.

"At the end of the day, we have some very strong long-term plans for this business," chief executive Tony Smurfit told The Irish Times after the company reported an 8 per cent increase in first-half earnings. "We value our independence. But obviously if somebody offers a 2020 price today our board would have to consider it."

Share price

Smurfit Kappa's share price soared last year amid unfounded reports that US peer International Paper was working on a €36-a-share offer for the company. With the stock currently at €21.50, valuing the group at €5.1 billion, it is trading at a 20 per cent discount to rivals, which Barry Dixon, an analyst with Davy, said "is difficult to understand".

The group moved its main listing to London this year, joining the keenly followed FTSE 250 index in June, in an effort to boost investor interest in the business.

Mr Smurfit suggested Smurfit Kappa's acquisitions spend this year will be nowhere near the €380 million it spent last year, including €186 million on two Brazilian businesses. He said the earnings contribution from these two companies would be below the €35 million to €40 million it had previously guided, as it grapples with a 50 per cent increase in the second quarter in waste paper in Brazil used to make cardboard boxes.

“Still, we’re more than happy with what we bought. These are very good assets with very good people,” said Mr Smurfit. “We waited 30 years to get into Brazil and find the right acquisition.”

Interim dividend

Smurfit Kappa said earlier on Wednesday that it had raised its interim dividend after posting an 8 per cent increase in first-half earnings before interest, tax depreciation and amortisation, to €593 million. The company said Brexit would have little direct impact on its business.

The company expects to “have a good year with earnings growth for 2016” even as it deals with higher raw material costs, more pronounced currency volatility and higher economic risks.

The volume of cardboard box sales rose 2 per cent in its main operations in Europe, while it continued to turn in "strong volume growth" in the Americas.

Brexit

Turning to Brexit, Smurfit Kappa said its UK business was “broadly self-sufficient” with local mills and corrugated products plants servicing the economy there.

“Any effect on SKG will principally be as a result of the withdrawal having a knock-on impact on UK/European gross domestic product and confidence,” it said.

While Smurfit Kappa found itself paying more than expected for old corrugated boxes for its recycled containerboard business in Europe, it expects to ultimately recover this with higher prices for its end product. This month it raised prices in northwest Europe for containerboard made from fresh pulp, and plans an increase in the UK next month.

In the Americas, the group turned in corrugated volume growth of 23 per cent, though its Californian business "remains somewhat challenging" and the Venezuelan business struggled with a difficult economic and political environment. The International Monetary Fund has forecast 700 per cent inflation and 10 per cent GDP contraction in Venezuela this year.

Mr Smurfit said the company remained committed to the Venezuelan unit.