Smurfit Kappa Group Plc

Smurfit Kappa Group Plc (LON: SKG) is a provider of paper packaging solutions. It distributes, manufactures, and markets corrugated containerboards, containers and other paper-based packaging goods.

Rationale for Valuation – Sell at GBX 3,254.00

• The Company is trading near a 52-week high, raising doubts at the upside potential at the current level.
• Moreover, the Company’s P/E, EV/EBITDA, and EV/Sales multiples are significantly higher as compared to corresponding multiples of the Containers & Packaging industry, reflecting overstretched valuations.
• On leverage front, the debt-equity ratio stood at 1.28x in H1 FY20, which was higher as compared to the industry median of 0.68x, reflecting that the Company is highly leveraged as compared to the industry.
• The operating landscape remains highly volatile with the continuing uncertainty of the COVID-19 pandemic, UK market might be moving into recession, and categories remaining highly competitive.
• From the technical standpoint, 14-day RSI stood at ~69.31, which means the stock price could decline in the short term.

Key Risks

• The Company’s financial position and operations are impacted by trade tensions, Covid-19 pandemic and geopolitical uncertainty.
• SKG’s manufacturing costs are impacted by price fluctuations in energy costs and raw materials.
• The pricing structure could be affected by overcapacity in the sector.

Trading Update (for the three months and nine months to 30 September 2020 (H1 FY20), as on 4 November 2020)

• In Q3 FY20, the Company’s performance was ahead of the expectations.
• It has also delivered a decent set of results for the first nine months of 2020, with revenue of €6,312 million, EBITDA of €1,125 million and an EBITDA margin of 17.8%.
• The Board has recommended a second interim dividend per share of 27.9 cent, which expects to pay on 11 December 2020.
• For FY20, the Company expects to deliver EBITDA in the range of €1,460 million to €1,480 million.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

The Company has delivered a decent performance in both the third quarter and in the first nine months of 2020. While some uncertainty still exists around the evolution of the effects of Covid-19 in the weeks ahead. The Company is an integrated player in the packaging business, and it has the ability to cope up with any downturn in the business. SKG sells the majority of the product to the FMCG sector, where the demand remains stable.

Reduction in share capital may harm the Company’s investment plan and shareholders wealth. Moreover, the operating landscape stays highly volatile, with the continuing uncertainty due to the COVID-19 pandemic. Further, the Company expects some adverse headwinds for the rest of the financial year 20220. SKG works in a challenging environment which requires continuous investment, sometimes at the cost of profitability, to stay ahead of competitors. It is advisable to book profit now and reinvest the amount of principal and gains at the right time and price. The stock made a 52-week low and high of GBX 1,831.00 and GBX 3,260.00, respectively.

Based on the risks associated and factors as discussed above, we have given a “Sell” recommendation on Smurfit Kappa Group at the current price of GBX 3,254.00 (as on 6 November 2020, before the market close at 8:08 AM GMT), while we will look forward to reinvesting at the right time when the market dynamics become favourable.

RSA Insurance Group Plc

RSA Insurance Group Plc (LON: RSA) is a General Insurance Company, which is listed on the FTSE 100 index.

Rationale for Valuation – Sell at GBX 668.63

• The Company is trading near a 52-week high, and Price/Earnings and Price/Cash Flow multiples are significantly higher as compared to corresponding multiples of the Insurance industry, reflecting overstretched valuations.
• The operating landscape remains highly volatile with the continuing uncertainty of the Covid-19 pandemic.
• The Company recently received a £7.2 billion takeover proposal from Intact and Tryg.
• From the technical standpoint, 14-day RSI stood at ~92.35 (overbought zone), which means the stock price could decline in the short term.

Key Risks

• The falling equity markets and interests' rates could put pressure on the insurers' balance sheets, life product profitability and investment management fees in short-term.
• The Covid-19 pandemic and wider economic downturn have been impacting the portfolio value of assets.
• The credit risk related to the customer-facing financial difficulties and their inability to pay the premium.

Recent News

On 5 November 2020, the Company stated that the Board of RSA Insurance Group had received a proposal on 2 October 2020 from Intact Financial Corporation and Tryg A/S regarding a possible offer for the Group. This proposal comprises 685 pence in cash per RSA share and interim dividend per share of 8 pence (which may or may not lead to an offer being made for RSA). It would also represent a transaction of around £7.2 billion with Tryg paying £4.2 billion and Intact paying £3.0 billion. If the proposal is materialised then Intact would retain RSA's Canada and UK & International operations, while Tryg would co-own RSA's Denmark business and Tryg would also retain RSA's Sweden and Norway operations, and Intact.

Q3 FY20 Trading Update (as on 5 November 2020)

• In Q3 FY20, the Company delivered decent progress, with a significantly improved combined ratio and lower investment income.
• In the first nine months of 2020, the Group net written premiums decreased by 3% to £4,663 million against 2019 YTD (year-to-date), with a decrease in Scandinavia premiums of 1%, Canada premiums of 1% and UK & International premiums 6%.
• For the first nine months of 2020, the Group business operating profit increased against the previous year.
• On 30 September 2020, the tangible shareholders' equity was £3.35 billion, balance sheet unrealised gains stood at £446 million and Solvency II coverage ratio was 159%.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Book Value Approach (NTM) (Illustrative)

Conclusion

In the third quarter of 2020, the second phase of the UK cost programme began, with £14 million of charges booked below the operating result. Despite providing fully for the UK BI Court ruling in September 2020, the Company recorded a discrete combined ratio of 90% in Q3 FY20. The Company stated that the outlook for continued underwriting improvements stays positive. Further, the Company also expects some adverse headwinds for the rest of the financial year 2020. Moreover, RSA works in a challenging environment which requires continuous investment, sometimes at the cost of profitability, to stay ahead of competitors. Hence, it is advisable to book profit now and reinvest the amount of principal and gains at the right time and price. The COVID-19 had an effect on premium income for customer reliefs and also various other direct economic impacts. The stock made a 52-week low and high of GBX 321.20 and GBX 736.84, respectively.

Based on the risks associated and factors as discussed above, we have given a “Sell” recommendation on RSA Insurance Group at the current price of GBX 668.63 (as on 6 November 2020, before the market close at 8:01 AM GMT), while we will look forward to reinvesting at the right time when the market dynamics become favourable.

*All forecasted figures and Industry information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.

The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.

Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser.