Inside the world of business

Smurfit shares still good on paper

THE FACT that Smurfit Kappa’s shares ended the day almost 2.5 per cent down at €5.05 in Dublin yesterday is more a testament to general stock market conditions than to the company’s first-half performance.

Its figures show that everything – sales, profits, cash flow and debt reduction – is travelling in the right direction. Second-quarter earnings before interest, tax and write-offs were €264 million, well ahead of analysts’ advance estimates, which pegged the figure at €256 million.

A strong performance in South America, where Smurfit does about 20 per cent of its business, helped it to overshoot the target set by analysts, while its European sales were solid.

Smurfit Kappa is not a terribly exciting company. It makes cardboard boxes, but the world uses a lot of cardboard boxes and – to a greater or lesser extent – is likely to continue doing so.

Granted, demand is likely to shift along with economic conditions in its markets, but the group continues to work on cutting costs. It recently took out extra capacity, while the prices it commands for its products continued to grow – they were up 2 per cent in Europe in the second quarter.

The group has been using cash flow to tackle its debt, and, by the end of this year, will have knocked a further €257 million off its liabilities. Granted again, there are uncertainties, there are signs that demand in Europe could level off and it may not continue to grow at the same rate at which it has been in South America.

Davy analyst Barry Dixon opted to revise down the stockbroker’s earnings estimate for the full year to around €1.05 billion from €1.09 billion. On that basis, and using a multiple of four to 4.5 times earnings, he suggests that the group should be worth between €6.60 and €9 a share.

That would imply that the market’s view of the stock has nothing to do with the realities of its business.

Analyst suggests we'll have to bear with crisis

IF YOU think that watching the financial markets crisis is a bit like tuning in to a cheap sequel to the classic horror that was 2008, think again.

At least one commentator thinks that this is going to be a long- running soap opera, not a short-lived movie franchise.

Viktor Shvets, head of research and strategy at Samsung Securities Asia, told CNBC yesterday that equities were stuck in a “long-term bear market”.

Shvets believes that the bear market could last for five to 10 years, and that stocks will be hard to value for much of that period.

If Shvets is right, it would have implications for anyone now in mid to late career who is putting a portion of their income into a pension scheme.

Exposure to shares that are ultimately running down in value means whatever portion of the fund is exposed to equities will head in the same direction, probably taking the fund’s overall value with it.

Shvets actually thinks that strong market rallies are further evidence of his theory.

You won’t lose money all the time in what the analyst describes as a “structural long-term bear market”.

In fact, he says, strong rallies are a feature of the phenomenon he is describing and occurred in the US during the Great Depression, even though the overall momentum was down.

“We actually will have periods of significant bear market rallies. Those rallies quite often are much more powerful than a normal cyclical market would be,” he told the broadcaster yesterday.

He explained that the wisest approach for portfolio managers to take in the circumstances was to focus on risk, as shares and other assets would be difficult to value for the forseeable future.

The really scary part for investors is that, while not all analysts agree with his thesis, they do agree that the current uncertainty is going to be with us for some time to come.