Smurfit Kappa shows confidence in outlook by raising dividend, analysts say

Smurfit Kappa posted a solid increase in half year sales and profits and announced an increased dividend payout on the back of continued "strong" growth in Europe and a good performance in the Americas.

For the six months ending on 30 June, the maker of corrugated and paper-based packaging reported a 8.0% rise in revenues to €4.62bn, alongside improved margins at the earnings before interest, tax, interest, depreciation and amortisation level from 16.4% to 18.3%.

EBITDA was up 17.0% to €847.0m (consensus: €838.0m).

That drove a 9.0% jump in profits before tax to €456.0m with earnings per share ahead by 13.0% to 140.6 euro cents.

Free cash flow meanwhile grew by approximately 8.0% to hit €159.0m and the company's return on capital employed improved from 18.1% to 18.7%.

Despite that, net debt rose from €2.871m to €3.751 - with an average maturity of 4.2 years - following acquisitions made in Bulgaria, Colombia and Serbia, as well as by the adoption of accounting directive IFRS 16.

The interim payout was hiked by 10.0% to 27.9 euro cents.

As at period end, the group had €247.0m of cash on hand and available commitments under its new revolving credit facility of roughly €1.13bn.

In terms of the outlook, group chief executive officer, Tony Smurfit said: "While macro-economic and political risks remain, SKG continues to be highly confident of another year of progress and delivery."

For their part, analysts at Jefferies reiterated their 'buy' recommendation for the shares following the company's latest update.

Although their 2020 estimates were roughly 3.0% below consensus, the shares were sporting about a 4.0% dividend yield and were trading on an enterprise value-to-EBITDA (excluding pensions) of 6.5 times, for a modest discount relative to the sector, they said.

"Given flexibility, if capex declines to in-line with depreciation (from elevated c.130%-140%) in FY20-21E then SKG on our forecasts would generate €600-700m p.a FCF (double the <€300m div) and trade on c.9% FCF yld with net debt/EBITDA de-leveraging c.0.3x p.a to below the bottom of its 1.75-2.5x range in FY21E."