Smurfit Kappa faces a €80 million headwind from rising costs of recycled cardboard it uses to make new boxes, having failed to push through a price increase with its customers in September, according to US investment bank Jefferies.
Meanwhile, a 15 per cent drop in the group’s market value in a little over three weeks, to €4.7 billion, has seen Smurfit Kappa fall to number four on the London market’s reserve list of companies vying to join the FTSE 100 by the end of the year.
Prices for old corrugated containers (OCC), the raw material for boxes made from recycled containerboard, have risen 20 per cent this year to €142 a tonne, due to increased demand in Europe and Asia, Jefferies analyst Justin Jordan said in a note to clients on Tuesday.
Smurfit Kappa purchases 4.3 million tonnes of OCC a year in Europe and 5.5 million tonnes globally, leading to a €80 million raw-material surge unless the company can raise prices for its end product, he said.
Lack of pricing power
“Packaging industry sources suggest Smurfit Kappa has been unsuccessful in targeted €40 a tonne (8 per cent) recycled containerboard (testliner) increase to offset higher OCC,” he said, adding that this was likely due to a lack of pricing power across the sector and a Dutch paper mill adding to capacity in the industry.
“Whilst European containerboard demand is growing by 2 per cent to 3 per cent, we fear four million tonnes [13 per cent supply] of new European containerboard capacity in 2016-2019, impacting pricing power and returns for all European corrugated box-makers,” he said.
Jefferies downgraded its stance on Smurfit Kappa’s stock to hold from buy, with the investment bank’s forecasts pointing to stagnation in earnings before tax, interest, depreciation and amortisation (ebitda) at the group in the next three years, at just over €1.2 billion.
However, the estimates do not factor in a potential earnings boost from acquisitions. While Smurfit Kappa's chief executive, Tony Smurfit, suggested in July that the group will spend nowhere near the €380 million it committed to deals last year, it remains on the lookout for potential purchases.
Mr Smurfit said earlier this year that Smurfit Kappa could spend as much as €400 million a year on deals without affecting the health of its balance sheet.
Shares in the company fell by 2.1 per cent on Tuesday in Dublin to €19.97.
On a positive note, Jefferies sees Smurfit Kappa’s debt level falling to 1.8 times ebitda in 2018 from 2.6 times last year and 5.5 times a decade ago. The investment bank estimates that the packaging group’s debt will decline to €2.27 billion by the end of 2018 from more than €3 billion last year.
