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Sep 6 2019, 11:35 IST/BST
Ratings and price correct at time of issue
|Company||Rating||Date||Previous Rating||Date||Closing Price|
|Smurfit Kappa Group||OUTPERFORM||30/06/09||N/A||N/A||2804c|
The management of Smurfit Kappa Group (SKG) and DS Smith presented at our annual Industrial Conference in New York this week. From a sector perspective, there were two significant take-outs. The first is that the demand environment in Europe remains solid (c.2% growth in line with our forecast) despite the deterioration in underlying economic indicators. This suggests that structural demand drivers are real. In this environment, containerboard prices are likely to remain stable. The second and more important takeout is the improved discipline around corrugated pricing. It is likely that box prices will fall by less than the 4% we have assumed for the second half of this year. DS Smith, historically more aggressive on pricing, now appears more focused on margins than volumes. Both companies this week issued bonds with record low (<=1.5%) coupons and both generate returns on capital and free cash flow yields of over 10%. The potential to create economic value is therefore substantial. Equity market valuations look wrong in this context. With current earnings forecasts now looking very achievable, the potential for a re-rating is significant.