N.A. Chems & Pkg’g "Paperboard Prognostications; Checking in with privat..."

Research evidence excerpt

N.A. Chems & Pkg’g "Paperboard Prognostications; Checking in with privat..."

Valuation Method and Risk Statement

Volumes for packaging companies are generally driven by macroeconomic factors, mainly

non-durable industrial production and eCommerce more recently. The companies are

exposed to commodities and have high operational leverage to operating rates and prices;

however, the global reach of the leading companies and degree of diversification are factors

reducing the risk associated to one product or market area. We value them using an EV/

EBITDA valuation framework.

IP: Our price target is based on an EV/EBITDA multiple relative to the local market. Paper

packaging company volumes are generally driven by macro-economic factors, including

demand for non-durable industrial production, e-commerce, processed foods, poultry, meat,

and agricultural products. Any decline in macroeconomic activity or consumer demand could

affect volumes negatively. Additionally, major costs affecting profitability of paper companies

are raw material, energy and freight and increases in these costs can impact margins. If

earnings decline substantially due to lower demand or higher costs, the stock would likely

decline as well. Another potential risk is that IP has added European exposure.

SW: Smurfit is subject to similar risks as the rest of the paper & packaging sector including

(but not limited to) paper prices, FX movements, declining consumer activity, changes in

packaging trends and overcapacity (including the potential for lower prices if competitors do

not shut older mills in response to large capacity additions). We value Smurfit using a 7.5x

target EV/EBITDA ratio applied to 12-24m forward EBITDA which assumes some convergence

of the valuation gap to peers IP and PKG.