Shareholders of FTSE 100 paper-based packaging group Smurfit Kappa (LSE: SKG) woke up this morning to the disappointing news that although revenue had increased during the first half of the year, profits had taken a dramatic tumble. Could it be time to sell up?
Cost inflation
The Dublin-based packaging giant delivered a 5% rise in group revenue to €4.23bn for the six months to 30 June, but pre-tax profits came in at a very disappointing €245m, 21% lower than the €312m reported for first half of 2016. Management blamed continued and unprecedented recovered fibre cost inflation amounting to around €75m year-on-year .
The company is now in the process of recovering these input costs as it moves through the rest of 2017 and into 2018. During the first half of the year, global containerboard supply has been very tight, and remains so. The resulting price increases have led to the company increasing its own corrugated prices in Europe and the Americas in Q2, and these increases will be progressively implemented throughout the remainder of the year and into the first quarter of 2018.
Short-term challenges
Unfortunately, the issue doesn’t end there. Continued shortage of supply and unabated input cost pressures in both regions have led to further containerboard price increase announcements for implementation during Q3. This in turn will require a further round of corrugated price increases by Smurfit in the fourth quarter and beyond.
These short-term challenges will undoubtedly have an impact on full-year earnings for 2017, but I’m satisfied that management is taking the necessary steps to recover the higher input costs, and will continue to grow earnings over the longer term. I still see Smurfit Kappa as an excellent long-term growth pick, trading on a very undemanding earnings multiple of 12.8 for 2017.
Share buyback
Meanwhile, Smurfit’s smaller rival RPC Group (LSE: RPC) gave its shareholders reason to be a little more cheerful recently as it reported first-quarter sales and profits ahead of last year, together with the announcement that it intends to begin a £100m share buyback programme.
The Rushden-based plastic packaging specialist generated £960m in revenues for the three months to the end of June, well ahead of the corresponding period last year, and helped along by the contribution from new acquisitions, organic growth, and favourable currency movements.
Vision 2020
The implementation of management’s Vision 2020 growth strategy also seems to be progressing well, with continued organic growth, good profitability levels and robust cash generation. Shares in the FTSE 250 group have performed exceptionally well over the years, finally punching through the £10 per share threshold for the first time at the start of the new year.
But I believe a sharp pull-back since January has presented an excellent buying opportunity for growth-focused investors who can now pick up the shares for less than 900p, equating to a very reasonable 13 times forward earnings.