Smurfit Kappa share price to double in next six months, say analysts
THE VALUE of shares in Irish packaging giant Smurfit Kappa could nearly double within the next six months, according to Goldman Sachs, which has placed the stock on its 'conviction buy' list.
Analysts Will Wyman and Olivia Macdonald predict that shares in the group will jump to as much as €14.10. The forecast helped boost shares in the group from €7.80 on Tuesday to as much as €8.20 by yesterday.
The pair of analysts said that following strong progression of containerboard prices in Europe, Goldman Sachs was forecasting margin expansion at Smurfit Kappa as the group passes cost increases through to customers via higher corrugated prices.
"We forecast rising utilisation on growing demand and stable capacity, which should support continued price progression," said the analysts. Smurfit Kappa, which releases third-quarter results next week, should also benefit from strong emerging markets demand, they added. Latin America and Eastern Europe account for 16pc and 4pc respectively of Smurfit Kappa's group sales.
Goldman Sachs said it was forecasting earnings before interest and tax (EBIT) growth at Smurfit Kappa of 27pc between now and 2012, and 22pc between now and 2013 -- the highest growth levels among peers in the paper and packaging industry.
"Our growth forecasts reflect a cyclical recovery in pricing from still-low levels in 2010, and the modest structural growth we expect in containerboard and corrugated demand," said the research report.
It added that the company's shares were trading at a discount of between 6pc and 19pc to its peers based on estimated earnings for the current year and 2011 respectively.
However, Goldman Sachs warned that there were some key risks that could dent a share price advance.
Among them is the danger that private equity firms Madison Dearborn, Cinven and CVC, who between them own 45pc of Smurfit Kappa (Madison owns 21pc), will probably seek to exit part or all of their positions in the medium-term.
That additional liquidity could create short-term negative price momentum, warns Goldman.
UBS recently upped its 12-month price target for Smurfit Kappa to €9.50, and cited the same warning as Goldman Sachs. UBS has also predicted that the packaging group could start paying a dividend in 2012.
The company recently said it was extending a shut-down of its plant in Nanterre, France, for another six months in order to keep the capacity out of the market.
It announced plans last April to temporarily close the plant.