Bank starts tracking Smurfit Kappa's stock performance
Morgan Stanley has initiated coverage of Irish packaging group Smurfit Kappa, rating it as 'overweight' and noting that the company is its "top pick" in the sector. The investment bank has pencilled in a price target of €13.40 for the stock, which jumped in early trading yesterday by as much as 3pc to €8.70.
"Smurfit Kappa becomes our top pick in the sector as the best way to play ongoing strength in corrugated pricing," said Morgan Stanley, in a research note yesterday.
It added that it believed the current share price was factoring in an earnings before interest, tax, depreciation and amortisation (EBITDA) margin of 12.6pc, compared to a range, since 2006, of between 12pc and 15pc. The bank also noted that Smurfit Kappa's cash flow should be sufficient to reduce debt to the target level of €2.8bn this year.
"We believe corrugated pricing will continue to rise and that the company will realise further cost savings, boosting margins by 210 basis points in 2011 to 15.6pc," explained the note.
"The share price appears to be discounting a decline in margins from current levels, which is too bearish, in our view, given what we consider to be a well-supported recovery in corrugated pricing."
The company releases first quarter results in May.