Smurfit Kappa insiders buy on weakness
Directors show faith in the paper group’s future
Prospects for the packaging and paper segment should benefit from an increase in online retail sales during the lockdown. That needs to be set against the virtual shutdown of the high street, both here and abroad, which will stall demand for disposable in-store packaging until normal commercial activity resumes.
For investors, it is reassuring that many products from the sector are routinely destined for less discretionary end markets, such as food and pharmaceuticals, and there has been a demonstrable shift in consumer habits towards delivery or food takeaway services. Meanwhile, supermarkets have struggled to restock produce as households tuck away storable foodstuffs, creating further demand for the packagers.
It remains to be seen whether the lockdown will accelerate the shift to online channels, although that seems highly likely. But even if it does not trigger a long-term change in consumer habits, conventional retailers may now look to reduce leasehold arrangements in favour of ecommerce.
Against this mixed backdrop, Smurfit Kappa delivered sales volume growth in Europe and the Americas during the first three months of the year, although cash profits at €380m (£334m) were down by 10 per cent year on year. The underlying margin pulled back by a full percentage point, but both these metrics were set against strong comparators in the first quarter of 2019.
The packager joined several other FTSE 100 constituents by pulling its full-year dividend. The emphasis is on capital preservation, so capital expenditure has been trimmed from previous guidance of €615m, to be in the range of €500m-€550m.
It remains a cash-generative operation, boasting liquidity of over €1.5bn, average debt maturities of over five years, and no bond maturity until 2024.
The group looks reasonably well set to see out current difficulties and there may even be M&A opportunities as its scale allows for optionality on that front. This might not have been lost on two directors in the group — Anne Anderson and Frits Beurskens — who picked up shares with an aggregate value just shy of £150,000 midway through the month.
Plumbing and heating products specialist Ferguson belongs to an elite club of UK companies that have cracked the formula to success in the US. Over four-fifths of the group’s continuing revenue and 95 per cent of underlying trading profit comes from across the Atlantic. Intuitively, spinning off its UK Wolseley business to focus on its more lucrative operations makes sense.
However, Ferguson has further ambitions to abandon the FTSE 100 altogether and shift its primary listing to the US, eyeing the “substantial incremental pool of capital” there. The group says discussions with a large chunk of its shareholders indicate a majority would support such a move. But if the vote were held now, it would likely fall short of the 75 per cent approval required. Some institutional investors oppose the strategy because they have mandates preventing them from holding shares outside of the UK.
For now, it is settling for a secondary US listing, guiding that it will revisit the issue in a year’s time. Chairman Geoff Drabble — former chief executive of Ashtead — believes this is “the most orderly and equitable path” to achieving its ultimate aim. Amid the current market turmoil, a vote on a dual listing won’t occur until the first half of 2021. Should conditions normalise, the Wolseley demerger is expected to complete this year as planned.
Uncertainty created by the Covid-19 pandemic has prompted the group to withdraw its full-year guidance and the 67.6c interim dividend. The $500m (£405m) share buyback programme has been suspended, although $100m-worth of shares have already been repurchased.
Mr Drabble remains bullish on his company’s prospects, having recently purchased 4,983 shares worth almost £250,000. He was joined by non-executive director Thomas Schmitt, who bought 13,500 shares for a little under £70,000.