Smurfit Kappa sees earnings forecast upgraded to €1.25bn
Packaging giant Smurfit Kappa is set to benefit from stronger demand and weaker currency headwinds this year and next, Davy stockbrokers has predicted.
The broker has upgraded its earnings forecasts for the packaging firm.
It now expects the group to post €1.25bn in earnings before interest, tax, depreciation and amortisation (EBITDA) this year, compared to a previous forecast of €1.23bn.
For 2018, Davy expects the company to generate EBITDA of €1.256bn, compared to its previous estimate of €1.236bn.
"The main driver of the upgrade is a better outlook for corrugated demand in both Europe and the Americas," according to Davy.
"In its results presentation, Smurfit Kappa management indicated that volumes had increased by circa 3pc in most of its main markets in the fourth quarter and that this rate of growth had continued into the first quarter," Davy analysts added.
"We have increased our full-year demand assumption to 2.5pc from 2pc previously."
Davy stockbrokers has retained its 'outperform' rating on Smurfit Kappa stock, with a €32 price target. By lunchtime yesterday, the group's shares were barely changed, at €24.96.
Davy added that the pricing environment for Smurfit Kappa remains positive. However, it said that it would hold off on further revisions to its outlook until there was greater clarity around raw material costs.
"The bias, however, is clearly upwards," said Davy.
Smurfit Kappa's input costs include old corrugated containers (OCC). In the US, OCC prices jumped from $79 per tonne last March to $114 last month.
Based on its revised forecasts for Smurfit Kappa, Davy expects the group to generate close to €450m in free cash flow this year, compared to the €303m it reported for 2016.
"While the company is now paying out over 40pc of earnings in dividends to shareholders, this still leaves close to €300m in cash flow to be allocated," Davy noted.
"While the company continues to state its preference for mergers and acquisitions, we believe it will only pursue this route if it makes financial and strategic sense. Absent acquisitions, we expect that Smurfit Kappa will use the cash flow to further pay down debt."
In such a scenario, Davy said it expects Smurfit Kappa's net debt to EBITDA ratio to fall to 2.2 by the end of 2017.
"Assuming no change in valuation (which we believe is too low), this pay-down in debt alone, which equates to over €1 per share, should accrete to the equity-holder," Davy added.
Last week, Smurfit Kappa reported record EBITDA of €1.23bn in 2016, a 5pc increase on the previous year. Its revenue was up 1pc at €8.1bn, and was 5pc higher on a constant currency basis.