Smurfit WestRock, formed last week from the merger of Smurfit Kappa and US cardboard box-making peer WestRock, is likely to find it “challenging” to integrate both businesses and realise the $400 million (€370 million) of pretax cost synergies in its first full year, according to analysts at Bank of America (BofA).
“We also consider that the market could become frustrated with ‘slow’ progress if integration takes longer than expected,” said the BofA Securities analysts, led by Patrick Mann.
However, the analysts have initiated coverage of Smurfit Kappa’s shares, which started trading on the New York Stock Exchange on Monday, with a buy rating, as the deal has been completed against the backdrop of an early recovery by the packaging sector from a recent downturn and the track record of the former Smurfit Kappa management, who now lead the entire group.
Smurfit Kappa, Ireland’s first multinational group, effectively doubled in size last week as the takeover of WestRock created the world’s largest paper packaging group, with a market value of almost $23.5 billion (€22.7 billion). Legacy Smurfit Kappa shareholders started off with 50.2 per cent of the enlarged business.
The group has retained Dublin as its headquarters, but has delisted from the Irish stock market and moved its main quotation from London to the New York Stock Exchange. Smurfit Kappa chief executive Tony Smurfit and its chief financial officer, Ken Bowles, are in charge of the larger company.
BofA Securities said that the prize for Smurfit WestRock, if it delivers on the targeted synergies and turns around underperforming legacy WestRock assets, could be a “re-rating” of the stock. This means that investors would be prepared to value the company at a higher level, relative to earnings.
Smurfit WestRock shares are currently trading at a level where the group’s enterprise value, including debt, is 6.7 times earnings before interest, tax, depreciation and amortisation (ebitda). The wider US packaging sector is trading at a multiple of 7.5 times, according to the analysts.
The outlook for the industry has improved significantly from when the merger agreement was announced last September. At the time, box makers were dealing with a slump in demand that followed a global spike in spending on physical goods, from televisions to patio furniture, during pandemic lockdowns.
“After a decline in 2023 – driven by destocking – we see long-term demand growth from sustainability near-shoring and ecommerce, as well as broader economic growth,” they said.
Destocking refers to customers running down packaging stocks. Near-shoring is a phenomenon where companies are progressively moving part of their production from distant, low-wage juristictions to countries close to their markets in order to minimise risks of disruption to supply chains.
WestRock had a strategy targeting $1 billion in cost and productivity savings by 2025 across its mill network, supply chain and general running costs, against a $18 billion cost base in 2023.
BofA Securities analysts say that Smurfit Kappa’s “well-regarded” management could accelerate this.
“We do not explicitly model an improvement in the legacy WestRock businesses and will take a ‘show me’ approach to incorporating potential upside,” they said.
While demand for packaging is recovering, the analysts say that there is too much capacity in the global market for containerboard, which is used to make cardboard.
However, over the past decade the old Smurfit Kappa had put greater focus on innovation and getting closer to customers, especially during the pandemic. “We believe it defines itself more as a ‘service’ business that delivers value and benefits to its customers, albeit mainly via packaging – as opposed to a commodity packaging provider,” BofA Securities said.
The enlarged group will need to demonstrate that this approach in Europe can be replicated in the US.
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