Monday 23 October 2017

Smurfit shares near €20 mark with ratings upgrade on cards

John Mulligan

John Mulligan

SHARES in packaging giant Smurfit Kappa could hit €20, according to Davy Stockbrokers, as positive momentum and a re-rating potential buoy the firm.

Speaking to the Irish Independent yesterday as Smurfit Kappa released third-quarter results, chief executive Gary McGann (pictured) said he couldn't predict when a ratings upgrade might take place.

"It's only a matter of time," he said, adding that the company already raises money in the debt markets at prices that are probably reflective of a better rating than the company actually has.

The company, while no longer considered a high-yield grade, now effectively has a crossover credit rating. That means it has a better rating than a high-yield firm, but remains below investment grade.

While two ratings agencies – Fitch and Standard & Poor's – have positive outlooks on Smurfit Kappa, Moody's has retained a stable outlook.

Mr McGann said the company will continue to pay down debt until such time that the company has a BB+ rating, that would be just very slightly below investment grade. The rating grade is important because it dictates how much interest it pays on funds it raises.

Mr McGann added that the European economy as a whole appears to be turning a corner, although it remains difficult to precisely ascertain its health given the conflicting data emerging.

Yesterday, new data showed that German factory orders rose 3.3pc in September compared with an estimated 0.5pc gain, while UK industrial production also rose more than estimated in September. However, on Tuesday, the ECB lowered its 2014 GDP growth forecast for the eurozone.

During the third quarter, Smurfit Kappa's operations fared strongly in the Americas but were a bit weaker in Europe.

Revenue in the period rose 10pc to €2.01bn, while earnings before interest, tax, depreciation and amortisation (EBITDA) gained 9pc to €303m. That EBITDA figure was higher than the consensus analyst expectation of €296m. The Americas accounted for 32pc of EBITDA and margins rose in the region following Smurfit Kappa's acquisition last year of California-based Orange County Container Group.

Smurfit Kappa's operation in Venezuela, where it is the country's biggest player, performed strongly. However, the firm incurred a €16m hit related to a currency trading loss after the country's Bolivar currency was devalued in February.

There's an expectation that a further devaluation will take place early next year.

Mr McGann said he expects that such a devaluation – if in line with the previous devaluation – will result in Smurfit Kappa recording a €55m reduction in its cash balances.

But the chief executive said the Americas remains strong and that there are even hints of an upswing in Argentina, where it also has operations.

Irish Independent

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