Smurfit Kappa shares jump on €193m dividend ‘surprise’

Cardboard box-making giant Smurfit Kappa Group (SKG) shares jumped on Wednesday as the company declared it will pay a €193 million interim dividend even as earnings dropped in the first half of the year as Covid-19 dented demand for packaging.

The size of the planned shareholder payment, equating to a final dividend on 2019 earnings that the group decided to pull at the height of the coronavirus crisis in April, caught the market by surprise, according to share traders.

"Nobody knew what was happening in March and April, so the board's prudent view was to defer the dividend. Since then, Covid-19 treatments are getting better, death rates are down and supply chains have been normalising," chief executive Tony Smurfit told The Irish Times, adding that the dividend plan reflected the strengths of the business, its balance sheet and long-term prospects.

Davy analyst Barry Dixon said: “Smurfit Kappa Group’s better-than-expected interim results reflect a business that is more resilient than its [stock] valuation rating implies. Most notable is the decision to pay a dividend, which says more about the outlook than any comment in the statement.”

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Earnings before interest, tax, depreciation and amortisation (Ebitda) fell by 13 per cent in the first half of the year to €735 million from the same period in 2019, with sales declining 9 per cent to €4.2 billion.

Food packaging

Between 75 per cent and 80 per cent of SKG’s business is in the supply of packaging for food and food-related related products. While grocery sales remained robust during Covid-19 lockdowns globally, cafes and restaurants were severely hit.

Although demand for SKG cardboard boxes in Europe rose 2 per cent in the first quarter of the year, it dropped 2 per cent in the second quarter as a result of the Covid-19 crisis. Still, Mr Smurfit estimates that the second quarter decline was about half of that experienced by the wider market.

European pricing for testliner and kraftliner paper used to make cardboard has fallen by €120 and €165 per tonne, respectively, from a high in October 2018 to last month.

In the Americas, a fall-off in business in the second quarter more than offset a strong start to the year, to deliver a 2.6 per cent decline in volumes for the first half as a whole.

Mr Smurfit noted that the group’s so-called sheet feeding cardboard business, which is ultimately used by everything from candle makers to auto companies, has seen volumes spike between 15-30 per cent in July, reversing a slump during the second quarter.

While the CEO said this was a “positive” development, he added that it was too early to draw conclusions about what this means for industrial activity.

Cash flow

Free cash flow across SKG rose to €238 million in the first half of the year from €159 million for the corresponding period in 2019, aided by lower investment and cash interest costs as well as a reduced need for working capital.

Net debt at the group stood at €3.26 billion at the end of June, or 2.1 times Ebitda – a ratio that was unchanged from December. It also had €646 million of cash and access to €1.09 billion of credit under undrawn facilities.

Shares in SKG rose as much as 6.3 per cent to €29.38 in early trading in Dublin on Wednesday, but subsequently moved off their highs.