Smurfit shares up 8% as pretax profit falls

SHARES IN packaging company Smurfit Kappa brushed off an 88 per cent drop in interim earnings per share to close 8.24 per cent stronger at €4.60 after the heavily indebted firm declared plans to increase its price for cardboard packaging.

Amid challenging conditions in the company’s European and Latin American markets, an increase of €60 per tonne for all containerboard grades from September represents a rise of between 15 and 25 per cent on the product accounting for 80 per cent of the company’s business.

Although the move is seen as a key test of conditions in depressed packaging markets, chief executive Gary McGann said it will not influence price levels until 2010 and would have only a “limited impact” this year.

“Materially reduced containerboard inventories and the progressively deteriorating condition of the containerboard industry in Europe are significant factors that support this price increase,” he said.

However, Davy analyst Barry Dixon said in a note that the move would need the support of the other main players in the sector to succeed. “We have heard that the independent, non-integrated players are looking for a €100 [per] tonne increase. If this move succeeds, it will have a significant impact on sentiment towards Smurfit Kappa and the sector. It should halt the fall in corrugated prices later this year.”

In the face of ongoing market difficulties last May, Smurfit Kappa scrapped its full-year profit forecast. There was no change in that position yesterday as the company reported an 18 per cent drop to €3 billion in revenues in the six months to June. Pretax profit fell 73 per cent to €39 million from €145 million, pre-exceptional operating profit dropped 46 per cent to €170 million while pre-exceptional earnings before interest tax depreciation and amortisation (Ebitda) and share-based payments dropped 29 per cent to €363 million.

Floated at €16.50 in 2007 and once valued at €20.88, the company’s stock has traded between €1.01 and €5.25 in the last 12 months. Basic earnings per Smurfit Kappa share dropped to 6.7 cent in the half year from 56.7 cent in the same period.

A small uptick in Ebitda in the April-June quarter was offset by downward pricing pressure. “While there is growing evidence that the rate of demand decline levelled off in the quarter, as yet tangible signs of economic recovery are limited despite the improvement in confidence indicators,” said Mr McGann

He said the company’s Ebitda margin remained comparatively strong in the first half at 12.1 per cent and reached 12.3 per cent the second quarter. Comparable margins in rival companies were slightly in excess of 6 per cent.

Last month Smurfit Kappa declared plans to eliminate as many as 140 jobs from its corrugated packaging plant in Togher, Cork, a move that will reduce its workforce in Ireland to 1,000. Mr McGann said there were no current plans for any further job cuts at the Irish unit but said he could not be expected to give an “open-ended commitment” on that front.

The company continues to reduce its cost base. Having stripped out an annualised total of €180 million between 2006 and 2008, it has cut €60 million from annual costs in the first half this year and expects to cut another €70 million in the second half.