Thursday 30 March 2017

Smurfit can be a short-term winner for investors with real courage

Thomas Molloy

Thomas Molloy

SMURFIT Kappa has been an extraordinary performer of late, but the papermaker, which floated in March 2007, remains one of the exchange's dogs when one takes a three-year view.

The company, which makes paper packaging for the likes of Tesco and Unilever, makes such a prosaic product that it is easy to lose track of the fact that returns over the past 12 months were a far-from-boring 387pc -- making Smurfit Kappa the second-best performer of the ISEQ over that period.

Bank of Ireland, also a disaster for long-term investors, was the best, with returns of 398pc.

Shares in the various companies -- which descend from the original Jefferson Smurfit company that was listed in Dublin in 1964 -- have always enjoyed mixed fortunes, along with those in most other paper makers, because the industry is prone to chronic over-capacity and cost cutting.

Smurfit shares are great for investors with a sense of timing but they don't make much sense as a long-term play.

The reason is simple; the industry requires expensive paper mills which must produce high volumes to break even. Once the cost of production has been met, extra production can be very lucrative, but there are inevitably problems if demand drops or too many rivals crowd the market.

An example of this came in 2008, when sales fell by just 3pc but profits halved.

Resurgence

Smurfit's recent share price advance reflects the belief of analysts that the industry is in a sweet spot right now and their expectations that the world economy will pick up in the years ahead.

Smurfit, which is strong in Europe and Latin America, should benefit from resurgence in some of the BRIC countries (Brazil, Russia, India and China), as well as Europe.

It should also benefit from tough cost-cutting over the past two years, which included scrapping the dividend and closing plants to stem losses.

Chief executive Gary McGann recently told analysts that he saw "positive momentum" in the company's order books and expected "meaningful" EBITDA growth in 2010. However, he also warned that "underlying input costs are heading upwards".

The message was hardly unexpected but the shares have been heading south since then, from around €6.60 to €6.15 today.

Smurfit has a further problem common to many large companies -- a debt pile of around €3bn. However, Mr McGann has been better at managing this debt pile than many others and the company does not face a major refinancing of its debt until late 2013.

The assured handling of the debt issue should give some reassurance to investors, but owing a multiple of one's market cap is rarely a good idea, especially in a mature market.

Mr McGann's main strategy appears to be expansion in Eastern Europe and Latin America. Here, the company has a reasonable track record, although there have been misses as well as hits.

Smurfit is now an important part of the ISEQ's overall weightings and is popular with analysts. Nine of the 11 analysts tracked by Bloomberg rate the stock a 'buy', while two rate it 'hold' and none rate it 'sell'.

Nevertheless, one still needs courage to buy a stock which has fallen from €21 in May 2007 to less than €2 last year.

Irish Independent

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