Should I buy Smurfit Kappa shares after this news?

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Europe’s leading corrugated packaging company, Smurfit Kappa Group (LSE: SKG), has just announced a $22m investment to expand its plant in Mexico to capitalise on the growing Latin market. Although this could boost Smurfit Kappa shares in the short term, I am all about the long haul when it comes to investing.

Are its shares a buy at 4227p today? Here’s why I think the company looks like a robust long-term investment for my portfolio.

Great market run

Smurfit Kappa shares are up 53.2% in the last 12 months. The packaging sector has gained a lot of ground over the past year, thanks to the eCommerce boom and like my fellow fool Rupert Hargreaves, I see Smurfit’s share prices rising steadily over the next year and beyond.

Smurfit Kappa boasts of much better five-year returns compared to direct rivals. While DS Smith and Mondi shares have gone up 13.1% and 28.7% respectively since 2016, Smurfit Kappa has gone up 116.8%. Over the short term, Smurfit shares have risen 21.2% in six months. Although this recent surge might put off some investors, I think the company is set for further returns.

Strong financials

The half-year (H1) results for 2021 look strong. Total revenue has grown 11% and stands at €4.67bn. The company reported EBITDA (earnings before interest, taxes, depreciation, and amortisation) of €781m for H1 2021, up 6% from 2020. In the Americas, pre-tax earnings increased by 19% from 2020 to €211m. Mexico, Colombia, and the US accounted for 78% of sales in the region where the demand for corrugated boards also increased by 11% increase.

In Europe, EBITDA increased 3% from 2020 to €591m in H1 2021. The demand for corrugated board is up 10% in the region and the company has announced expansion projects in France, Slovakia, Poland, and the UK to keep up with the increasing demand. 

Net debt to EBITDA ratio declined to 1.6 times from 2.1 times in 2020. This is despite major investments in sustainable practices including a recycling mill with a capacity of 600,000 tonnes in Northern Italy. The company was able to rise to the demand surge in 2020 easily and was the first company to secure Amazon‘s ‘Frustration-Free Packaging’ and this partnership makes me optimistic of a steady increase in revenue in the future.

Diluted earnings per share went up to 119.2 cents (2020 – 116.4 cents). The final dividend for 2020 was 87.4 cents per share Also, an interim dividend payout of €76m at 29.3 cents per share for 2021 has been announced.

Concerns

Growing taxes and an increase in prices of raw materials is an ongoing issue for companies in the packaging segment. Despite Smurfit’s push towards sustainable manufacturing methods, paper pulp prices remains a subject of concern.

However, the company has a price recovery plan in place to offset the growing costs of pulp. Combined with an increased focus on recycling, I think revenue will remain steady in the long term. Although I expect the current rate of growth to flatten out in the next 12 months, I am confident that Smurfit Kappa shares can offer steady returns to my long-term portfolio. I expect the company, as a market leader in terms of sales and innovation, to ride the wave of e-commerce dominance over the next decade.

The post Should I buy Smurfit Kappa shares after this news? appeared first on The Motley Fool UK.

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Suraj Radhakrishnan has no position in any of the shares mentioned. The Motley Fool UK has recommended DS Smith. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.