Smurfit Kappa Group: In line results and upbeat outlook for 2010
Smurfit Kappa Group (SKG) today reported its Q4 09 results, largely in line with expectations. The y/y gap has notably contracted, with sales down 5.5% and EBITDA down 5.1%. As anticipated, management is upbeat about the prospects for 2010 and has guided for a ” meaningful EBITDA growth”.
Rating: We remain positive on Smurfit Kappa and maintain our Market Weight recommendation on SKG’s sub 7.75% notes and our Overweight rating on new senior secured 7.25% and 7.75% notes at current levels. While the sector is still to overcome some serious challenges (getting corrugated price increases to stick, managing new capacity coming on stream, upward cost pressures, etc, we believe Smurfit is emerging stronger and leaner from the cyclical downturn and expect a much stronger 2010. We believe the company will generate significant positive FCF and further strengthen its balance sheet in the absence of any material debt financed acquisitions.
Outlook: The focus for 2010 will be corrugated pricing, the ultimate driver for Smurfit. Box prices in Europe declined c.11% in 2009 (with an 8% volume drop) and the trough period fell on September, according to the management. In Q4 09 first signs of price recovery could be seen with a c.3% increase, however the challenge for the current year will be achieving a total of 8-11% planned price increases. Containerboard prices turned around in H2 09 and Smurfit recently announced a series of price increases for January and February. These measures, supported by other industry players, should be supportive for corrugated price initiatives, albeit with a time lag. Thus, management has cautioned on the margin squeeze in the near term (Q1 10), with a pick-up later in the year as corrugated pricing catches up.
Overall, management expects to deliver meaningful EBITDA growth in 2010. With respect to potential future non-organic growth options, management’s preferred region is Latin America, where Smurfit already holds a strong position. In our view, potential acquisitions are likely to be considered opportunistically.
Cash flow, leverage and liquidity: Smurfit maintains strong positive FCF generation (EUR172.0mn in FY 09) and operates well within its recently amended covenants. Current net leverage stands at 4.1x versus covenant of 5.4x and we believe the covenant of 5.1x by December 2010 will be met with comfortable headroom. The company’s liquidity position remains ample, with an accumulated cash balance of EUR601mn and a further EUR525mn available under its RCFs.
Source: Natalia Krol Credit Research
About Smurfit Kappa
Smurfit Kappa Group (SKG) is a world player in paper based packaging with leading market positions in Europe and in Latin America.
With sales in 2008 in excess of € 7 billion and around 40,000 employees, the Smurfit Kappa Group is a focused player in paper based packaging. Operating in 31 countries (22 in Europe and 9 in Latin America), it is the European leader in containerboard, solid board, corrugated and solid board packaging and has a key position in several other packaging and paper market segments including graphic board, sack paper and paper sacks. It is a market leader in corrugated in Latin America and occupies the number two position in containerboard there. Its Group headquarters are in Dublin with regional headquarters in Paris (Europe) and Miami (Latin America).