Industry Reports

Deutsche Bank Reports Summaries

080430 Deutsche Bank Report - Smurfit-Kappa U.S. Investor Tour

Deutsche Bank - Equity Research

Smurfit Kappa {Ticker: SKG.I, Closing Price: USD E8.00, Target Price: USD E16.00, Recommendation: Buy}.

Investor meetings with SmurfitKappa

SmurfitKappa is the largest producer of containerboard and corrugated packaging in Europe as well as Latin America. We rate the stock a Buy, supported by healthy FCF generation and a stable earnings growth outlook. With the stock currently trading at 5.0x our current 2008 EV/EBITDA estimates and at a FCFE yield of 20%, we thought this an opportune time to review the SKG situation. Our U.S.- based colleague Mark Wilde, who has past experience of the firm in its prior existence as Smurfit Group, contributes thoughts following a U.S. roadshow.

SKG generates superior margins

The important drivers appear to be: (1) a boxmaker's mentality toward the business (very similar to PKG in the US), (2) a willingness to surrender volume in order to get better prices, (3) a relatively low percentage of its box business tied to trade publication indices. The strategy is to expand in fast-growing locations like Eastern Europe (Poland and Russia) and Latin America (especially, Brazil).

Investor concerns include rising capacity and higher input costs European capacity is forecast to rise by 1.5MM mtons/year by 2010. At the same time, raw material costs are rising. However, SKG suggested that potential for further margin compression appeared limited. Some smaller players are already operating at a loss, and the industry is responding with market downtime.

Valuation/Risks

Our DCF-based price target remains Euro 16.  Our PT has been derived using the DCF approach on our base case earnings scenario. We assume a 3% revenue CAGR '06-'12 and a 7.5% weighted average cost of capital (rfr 4.3%, erp 6.5%, 40% equity/60% debt).  However, given the mature nature of the industry, we assume a conservative terminal growth rate of 1.5%. The main risks include a slowdown in the European economy, higher input costs, and capacity additions. See page 4 for details of valuation and risks.