Business World

Friday 20 April 2018

Broker puts €15 target on Smurfit Kappa shares following acquisition

John Mulligan

John Mulligan

Shares in packaging giant Smurfit Kappa are undervalued following its acquisition last year of California-headquartered Orange County Container Group, according to Davy Stockbrokers.

The broker's head of research, Barry Dixon, has placed a €15 price target on the shares and reiterated his 'outperform' rating. It could mean more than 20pc upside for investors.

Smurfit paid $340m last year to buy Orange County. It was Smurfit's single biggest acquisition since Jefferson Smurfit merged with Dutch firm Kappa in 2005. The US business has since been renamed SKOC.

The US business operates eight main packaging facilities in northern Mexico, as well as seven distribution centres in the country. It also has two packaging facilities in southern California and a recycled container board mill in Dallas. It owns recycling centres in Texas, Arkansas and Oklahoma.

Its sales last year were in the region of $550m and it generated earnings before interest, tax, depreciation and amortisation (EBITDA) of about $60m.

"It provides an independent growth platform for the group in terms of the high-growth Maquiladora region of northern Mexico as well as a longer-term opportunity to develop in the US market," said Mr Dixon.

He said that since the acquisition of the Orange County business, Smurfit Kappa management had indicated that the Irish group might consider building a presence in the US market should an appropriate opportunity arise.

An estimated 60pc of the division's end market sales are for white goods and industrial, with 40pc for Fast-Moving Consumer Goods (FMCG). Of this, 40pc is in the electronics/television market. In Europe, Davy reckons that 60pc of Smurfit's revenues are from the FMCG market with 40pc from industrials and white goods.

"With export volumes from the Maquiladora region likely to grow by 10pc per annum over the coming years, SKOC is likely to continue to generate decent profit growth," said Mr Dixon.

"This, combined with the potential for organic as well as acquisition-led growth in the US, could result in SKOC becoming a more significant part of SKG's Americas operations.

"We estimate that SKOC and SKG's original Mexican business now account for circa 10pc of group EBITDA – circa €110m. In our view, this division should trade at a US-type EBITDA multiple of circa seven times," he said.

Consequently, he said he was raising Smurfit Kappa's price target to €15. Shares in the company were trading down about 2.5pc at €12.26 at lunchtime in Dublin yesterday.

Irish Independent

Business Newsletter

Read the leading stories from the world of Business.

Also in Business