Smurfit Kappa Group plc under-pinned by prospects of a bid

Smurfit Kappa Group plc is an Irish Company. They are one of the world’s leading packaging companies using paper and cardboard materials. The company has operations in 35 countries with 46k employees and supplies thousands of customers with their packaging needs, particularly corrugated packaging and containerboard.

Its main quote is on the London Stock Exchange in GBP. It is a FTSE 100 company with a market capitalisation of 7.4 billion.

About a year and a half ago in February 2018, Smurfit Kappa’s board received an approach from the US paper company, International Paper Inc, offering to purchase the company at a premium to the prevailing price. The price offered was EUR 36.46 per share.

Smurfit Kappa’s board rejected the offer, indicating that it did not fully value the company. After some discussions International Paper raised their offer to EUR 37.54 per share. Smurfit Kappa’s board continued to reject the offer. Finally, in June 2018, International Paper dropped it bid, due to lack of engagement with the Smurfit Kappa Board. Under stock Exchange rules they may not may a fresh bid for a period of one year. So far (as of 2nd July 2019), International Paper have given no indication that they may make a “hostile” bid for Smurfit Kappa.

After the bid was dropped, the share price of Smurfit Kappa Group plc fell. It fell particularly heavily when markets fell at the end of 2018.

The EUR 37.54 offer is equivalent to GBP 33.64 at today’s exchange rate of GBP/EUR=1.116.

The current share price of Smurfit Kappa plc (2/7/2019) is £24.65. (Equivalent to EUR 27.46).

The previous offer was thus some 36% above the current share price.

Institutional shareholders are most likely upset that they were not offered the opportunity to accept the International Paper bid. Smurfit Kappa’s board is under pressure to demonstrate that they were right to reject the offer.

In February 2019 Smurfit Kappa unveiled outstanding annual results for 2018 with revenue up 4%, EBITDA up 25% to EUR 1,545 millions, and pre-exceptional earnings per share up 58% to EUR 2.92. They raised the final dividend by 12% making the total dividends declared in respect of 2018 11% higher than 2017.

In May 2019 Smurfit Kappa gave a trading update for the three months to 31st March 2019. Compared with the same period in the prior year, this showed revenue growth of 7%, EBITDA growth of 25% to EUR 424 million, and an increase in margin from 17.3% to 18.3%.

The company plans to release its half year results to 30th June 2019 on 31st July 2019.

Given the pressure that the board must feel to justify their rejection of the bid, I would expect another set of strong results, and a hike in the interim dividend.

For fundamental investors, the company is trading on a p/e ratio of 9.41 which makes it seem quite cheap compared to the market average of around 15X. The annual dividend paid in 2018 amounted to EUR 0.976 per share, giving it a yield of 3.55%.

Looking at the chart, you can see that the bottom seems to be behind us. Arbitragers have now exited and the remaining institutional investors appear to have overcome disappointment at the company’s failure to put the offer to shareholders.

In conclusion, we have a company under pressure to significantly improve its results. It is trading at a very low price/earnings ratio , and has a decent yield with prospects of future growth to come. The icing on the cake would another bid. The upwards trend in the share price over the couple of weeks may indicate that good news is coming.