€9m loss, but Smurfit expects 20% growth

SMURFIT Kappa Group (SKG) is expecting to generate earnings growth of around 20% this year, despite just posting a pre-tax loss of €9 million for the first half.

The Dublin-headquartered international paper and packaging giant yesterday reported an 11% year-on-year increase in EBITDA (earnings before interest, tax, depreciation and amortisation) to €404m for the first six months of the year and a 22% rise in operating profit to €206m. However, after an exceptional cost of €56m (largely relating to an asset swap deal) operating profit for the six months to the end of June amounted to €150m.

Meanwhile, the group’s pre-tax loss of €9m — technically down from a pre-tax profit of €39m at the corresponding stage last year — was impacted by an exceptional cost of €42m. This, again, largely related to SKG’s asset swap deal, which saw it acquire the corrugated operations of British paper maker, Mondi and sell it its European sack converting operations.

Without that exceptional cost, SKG made a pre-tax profit of €47m. Group revenue was up by 7% year-on-year, at €3.23bn.

SKG chief executive Gary McGann said that the first half figures — including an improvement in EBITDA margin to 13% — were boosted by price recoveries in Europe and Latin America, the group’s core geographical markets, and a healthy pick-up in demand across all key markets.

“By the end of 2010, our cost take-out programme — initiated in 2008 — will have generated €300m of saving benefits; thereby significantly enhancing our cost competitiveness. The group’s lean cost base, its ongoing customer and market focus; combined with its judicious capital allocation decisions and financial discipline; will contribute to delivering superior returns compared to its industry peers through the cycle,” Mr McGann added.

While initial market reaction to the figures seemed muted (SKG’s share price was down by 19c, at €7.65) longer-term analyst outlook is more upbeat.

Davy Stockbrokers has reiterated its “outperform” tag on the SKG stock, maintaining its €12 share price target in the process. “In terms of outlook, pricing and volume trends have continued in July and management now expects full-year EBITDA to be 20% higher in 2010. This implies EBITDA of around €900m this year, with our full-year 2011 forecast likely to increase to over €1.2bn — a 5% upgrade for both years,” it said.