Smurfit Kappa is undervalued: Davy

Irish packaging group Smurfit Kappa Group is undervalued compared to similar companies operating in the same sector, according to Davy Stockbrokers.

Davy’s analyst Barry Dixon said they were forecasting better performance from the packaging group as the price of its product, Kraftliner, and a cost-cutting programme across the organisation will result in a higher returns in the company.

“Based on these revised assumptions, we expect the company to generate over €218m in free cash flow this year, resulting in net debt declining to just over €2.5bn by year-end from €2.75bn at the end of 2011,” said Mr Dixon.

“This implies a free cash flow yield of 16% and a net debt/EBITDA of 2.5 times by year-end.”

Davy’s have pushed their forecast upwards after they took account of the positive pricing trends in the packaging sector.

“Based on our revised EBITDA forecast and lower year-end net debt, the company is trading on circa 3.8 times 2012 EBITDA,” said Mr Dixon.

“This is a significant discount to its peers and the sector.

“With positive pricing trends likely to continue later in the year, the risk to our forecasts is upwards.”

Last week, Smurfit Kappa reported that its profit jumped by 20% in the first quarter of this year, netting the company an extra €30m.

The group’s strong performance was boosted by its Latin American operation. Businesses in that region contributed 23% of the group’s overall EBITDA in the quarter, worth over €56m.


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