Moody's indicates upgrade likely for Smurfit Kappa
Moody's has said it could upgrade its ratings on Irish packaging group Smurfit Kappa in coming quarters if the company can establish a track record of maintaining its current metric levels and a balanced financial policy.
Raising Smurfit Kappa's ratings outlook from stable to positive yesterday, Moody's analyst Anke Rindermann said that the group had delivered "solid progress" in increasing its financial flexibility, which she said had been achieved on the back of recovering operating profitability and considerable free cash-flow generation that has been applied towards net debt reduction over the past number of quarters.
She added that the improved ratings outlook reflects Smurfit Kappa's guidance for a continued focus on net debt reductions "which in our view is likely to support further gradual improvements in the group's debt coverage metrics over the short to medium term, despite an increasingly uncertain economic climate". Moody's also reaffirmed the Ba3 corporate family rating for Smurfit Kappa.
Shares in Smurfit Kappa have been badly beaten by the recent global stock market rout, with investors fearing that its highly leveraged position leaves it vulnerable as consumer demand potentially weakens. Most of Smurfit Kappa's products are used in packaging goods that end up on supermarket shelves.
But Smurfit Kappa chief executive Gary McGann insisted earlier this month that investors' rush to offload the company's stock ignored "massive fundamentals" of the company. He also told investors that he planned to reduce Smurfit Kappa's debt levels to around €2.85bn by the year end, from just over €3bn at the end of June.
"While high input cost inflation for key raw materials, such as recovered fibre and energy, continue to pressure the profitability of the group, its cash flow generation remained strong," Moody's added.
"Given anticipated further net debt reductions and Smurfit Kappa's strong focus on further recovering high input costs through targeted price increases in its corrugated operations, Moody's believes that the group is likely to be able to sustain improvements in credit metrics, even in a scenario of more difficult trading conditions."
Shares in Smurfit Kappa closed up 4.2pc at €5.12.