• Strong H1 21A results across all metrics: Revenue +11% y/y (+8% h/h); EBITDA +6% y/y (+1% h/h), with a robust EBITDA margin of 16.7%. Interim DPS up 5% y/y and working capital management remains robust at 8.1% of sales. Net debt/EBITDA of 1.6x stable (targeted range of 1.5-2.0x) and ROCE stable at 14.8% (17% target).
  • Cost inflation has been material: Q2 saw the beginning of cost pass-through and SKG expects this to continue well into next year. OCC headwind in H1 was EUR 192mn (H2 21E: EUR 250mn). Energy costs have also picked up, with a EUR 30mn headwind in H1 (H2 21E: EUR 70mn but mostly hedged already). In our view, cost inflation coupled with tight supply is likely to support further containerboard price increases and accordingly box price increases.
  • Verzuolo testliner mill to be acquired from Burgo, which was converted just 18 months ago: The mill is in Northern Italy and SKG expects it to be one of their most efficient mills in the group. For a EUR 360mn purchase price, this is “significantly below replacement cost”. The deal was concluded in just 41 days and will improve SKG’s current short testliner position of c.650ktpa (slightly long kraftliner). There is further organic expansion possible at the mill with a lead time of > two years. At full ramp-up of 600ktpa, this will supply SKG’s box plant system in Italy, France and Spain. This deal also delays the need for internal conversion projects for a few years. The mill is expected to produce 500kpta in FY 22E and 600ktpa the following year. The mill is expected to offer further organic growth with CapEx of EUR 20mn.
  • Europe (74% of EBITDA) benefitted from strong volume growth: Revenue increased by 12% y/y (+8% h/h), while EBITDA increased by 3% y/y (-2% h/h) and volumes were up 10% (+9% vs. 2019). Robust top line growth was not enough to offset cost pressures, which saw the EBITDA margin contract to 16.2% (-140bps y/y and -172bps h/h). There was some pricing benefit, but most is expected to be realised in H2. Demand is strong and the market is tight.
  • Americas (26% of EBITDA) also benefitted from strong demand and further integration: Revenue increased by 10% y/y (+8% h/h) and EBITDA jumped 19% y/y (+9% h/h), with corrugated volumes up 11%. Robust top line growth and favouring containerboard for internal consumption over exports saw the EBITDA margin expand to 20.5% (+149bps y/y and +6bps h/h).
  • Corrugated demand growth extremely strong and is expected to continue: SKG have been sold out globally. Their volumes were up 9% when compared to 2019. Customers are committed to moving big volumes into recyclable packaging. This transition in favour of sustainable packaging is progressing at a lower level than expected due to global shortages across the supply chain (plastic and fibre).  
  • Bullish outlook for SKG and the industry: SKG believe they have never been better positioned. H1 was impacted by cost inflation but SKG expected earnings to accelerate in H2. SKG expects demand to remain strong into H2 (Q4 traditionally strong). Containerboard stocks are “well below” balanced levels – if there is an outage for 2-3 days, everyone starts scrambling for volumes. SKG sees nothing on the horizon that could be negative for box volumes. SKG is looking to accelerate capital plans as they see “significant opportunities ahead”.
  • SKG are bullish on the MT: “There is not enough paper”, demand has grown much stronger than expected. “Globally, paper is short” and do not expect this to change in the MT due to market growth levels remaining very strong. SKG are bullish on FY 22E as economies open further, supported by further spending power from stimulus in Europe and Americas. SKG appear comfortable that there will be no new major supply but rather continued ramp-up of new machines.

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