Moody’s positive on Smurfit Kappa after equity raise
:: But ratings agency wants more evidence that Irish packaging giant can sustain low leverage
RATINGS agency Moody’s is looking for “further evidence” that Irish packaging giant Smurfit Kappa can sustain a lower level of leverage after the company raised €660m in equity from shareholders. Moody’s has changed its outlook on the group to positive from stable, however.
Smurfit Kappa, whose chief executive is Tony Smurfit, raised the equity last week to accelerate its growth strategy.
The company is one of the largest packaging groups in the world and has been a big beneficiary of the increased push towards online retailing because of the pandemic.
It said it has identified €1.2bn to €1.4bn of investment opportunities, which it believes will “strengthen the business for the long-term by increasing the group’s competitive advantage in the marketplace operationally, commercially and financially”.
Moody’s said the company’s rating is supported by its “large scale, regionally diversified business profile with a leading market position in paper-based packaging”.
“While additional funds will improve already strong credit metrics for the rating, we are looking for further evidence that a lower level of leverage can be sustained, as higher investments will also result in a very limited, if any, free cash flow generation post dividend payments in the coming years,” said lead analyst for Smurfit Kappa at Moody’s, Vitali Morgovski.
Moody’s noted that while Smurfit Kappa’s product portfolio is more concentrated compared with some of its investment grade rated peers, “with sustainable, 100pc recyclable paper-packaging solutions it is focused on a structurally growing part of the forest products industry”.
Following last week’s equity raise, the ratings agency expects Smurfit Kappa’s gross leverage will decline below three times earnings before interest, tax, depreciation and amortisation (Ebitda) by the end of 2020 – below the three to four times net debt to Ebitda level defined by the agency as appropriate for a Baa1 rating category.
It added that the group has reiterated its aim to bring net debt to Ebitda ratio to 1.75 to 2.5 times, aiming for the lower end of the target range.
“The company’s commitment to reduce and sustain leverage at a consistently lower level may lead to further positive rating action,” said Moody’s.
Smurfit Kappa generated revenue of just over €9bn last year and a pre-exceptional operating profit of €1.06bn.
Mr Smurfit said last week that the group is been well-positioned to capitalise on structural growth opportunities that have emerged from the pandemic.
“The continued development of e-commerce and the increasing demand for sustainable, paper-based packaging are presenting opportunities for Smurfit Kappa,” he said. “Accelerated investment, at this time, will allow us to increase our competitive advantage, align us with the sustainability goals of our customers and enhance our operational efficiency.”