Smurfit Kappa Group
Q2 results could benefit from lower OCC prices; debt likely to decline further, although FX will limit the reduction; outlook for recycled containerboard prices will be of keen interest
27 July 2012
FACTS: Smurfit Kappa Group will report Q2 results to end-June on August 1st.
ANALYSIS: We are forecasting EBITDA for the period of €248m (consensus: €243m) on revenues of €1807m. EBITDA is broadly flat compared to Q1 and down over 5% from the €264m reported in Q2 last year. Our forecast is based on flat (sequentially) corrugated and OCC prices for the period with volumes down 2% year-on-year. Given that OCC prices declined from early May through to the end of the quarter while it seems that corrugated prices were broadly flat, the Q2 numbers could be better than our forecast. Recent reports from some of SKG's peers have indicated that volumes have held up better than expected.
Net debt is likely to decline by circa €20m in the quarter from the €2775m reported at the end of Q1. This includes a negative adjustment of €22m from the impact of the weakening euro/US dollar exchange rate on SKG's dollar-denominated debt. It also includes our estimate of the cash cost of the refinancing arrangement announced in Q1, which we estimate at €7m. Excluding these "once off" items, net debt should have fallen by circa €50m.
While the results will be of interest, of far greater importance is the outlook for the full year and, in particular, whether management will reiterate its guidance for full year EBITDA "broadly similar to 2011" i.e. circa €1bn. There is no doubt that the macroeconomic outlook for the European area has deteriorated since May, and it will be interesting to see if this results in a change in outlook.
Also of interest will be management's comments on its recently announced €100/tonne increase in recycled containerboard prices. While there is some scepticism in the market as to whether this increase will be successful, we believe that other players will follow suit, increasing the chances that some or all of the increase will be successfully implemented. As we outlined the other day, even if the announcement is sufficient to halt the slide in recycled containerboard prices, it will be a positive for SKG and the sector. If it is fully implemented, then it has a significant (3-35%) impact on forecasts for both SKG and DS Smith while we estimate it would result in a 15-20% upgrade for Mondi's profits on a full year basis.
DAVY VIEW: It is possible that SKG will deliver better-than-expected results next week, driven by short-term margin expansion. This benefit, however, will not be permanent and margins will deteriorate if corrugated prices fall in line with recycled containerboard prices later this year. If management can convince the market, however, that some or all of the proposed containerboard price increase can be successfully implemented, then there is upside to forecasts. This, combined with further reduction in debt levels, could result in a re-rating of the stock from its current very low level of sub-4 times 2012 EBITDA. We remain positive on the outlook for the share price and reiterate our 'outperform' rating.