There was good news all around for the European paper sector yesterday (July 16th). Containerboard demand continues to grow strongly while the recently announced price increases in recycled containerboard appear to have been successfully implemented. Further increases are likely as US market conditions improve and the US dollar/euro rate remains strong. All these factors bode well for earnings momentum in the European packaging sector. This positive sentiment is likely to be reflected in the forthcoming results statements from Smurfit Kappa Group on July 29th and Mondi on August 6th.
￼Smurfit Kappa Group’s focus on innovation and differentiation is not just an additional cost of doing business. Rather, it is a strategy to help the company to gain market share and customer loyalty and at the same time increase both revenue (price achieved for corrugated) and margins.
While this may not impact returns in the short term, this strategy clearly underpins the company’s recently revised long-term return target of 15% – unheard of in this industry in an historic context. SKG’s plan to transform its business in this way is not reflected in the current valuation, even after the recent rally in the share price.
A structural re-rating is merited and we are very confident in retaining our ‘Outperform’ rating.
If there is something going on they are playing their cards exceptionally close. Markets are not even sure or we would have crossed 30 by now. If there is any sudden spikes next week we can assume news is on the way.
Equities: SKGFeedback from Investor Day, flat German prices While there was no big bang at SKG’s investor day, the event clearly illustrated how far SKG has come from the troublesome years of 20092010, how the Group is increasingly driven by a customerled approach and how M&A is once again at the top of SKG’s agenda. Bid spec was dismissed. Separately, pricing data released yesterday suggests there is as yet no momentum behind the planned €40€60/tonne price increase for April. After several years where the focus was on cost cutting and debt paydown SKG's focus is now on investing (capex and acquisitions) and driving top line growth. The Group is looking to take a more proactive customer approach and has launched the "Open the Future" brand initiative which sets out how SKG is different from its competitors by providing tangible evidence based benefits for its customers based on its deep insight and technology. SKG expec ts this initiative to drive additional top line growth (from 2016 onwards) but no specific targets were provided. We believe this strategy should see SKG gain market share in Europe, mainly at the expense of smaller players. In terms of its own M&A strate gy management reiterated its stance that it has a clear desire to carry out deals which will expand its presence in Emerging Markets or reinforce is position in attractive European markets (ruling out France). It would not rule out a large deal if such a d eal was a rational and logical deal to do, while maintaining a credit rating of Ba1/BB+ is key to the company.
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