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UPM will report its next quarterly results on 25 April. We reiterate BUY with a TP of EUR 36 (38). Q1'24e EBIT of EUR 265m.
UPM-Kymmene Oyj
4Q EBIT ahead of consensus but H1 guidance weak on production downtime UPM''s Q4 comp. EBIT fell 50% yoy but was 4% ahead of consensus albeit 20% below our expectations due to misses in Energy and Fibres. Despite being uncovered, the EUR1.5/ share dividend was maintained reflecting UPM''s confidence in benefits to come from capacity ramping in 2024 and 2025, and a strong balance sheet. Near term though UPM guided to a surprise decline in 1H24 EBIT, in part due to a large step up in power plant and mill downtime. We cut forecasts, albeit the impact is more limited in outer years, whilst our DCF-based target falls to EUR35. With shares down excessively, in our view, we still see upside. Trading on 10x 2025 EV/EBIT we reit. Outperform. UPM''s Fibres segment is charting a volatile path through its capacity ramp up... Fibres (pulp) volumes were broadly stable as Pasos de los Toros'' ramp up was interrupted by problems that have now been resolved. However in 1H24 management anticipates a EUR100m drag from planned maintenance in this and other mills, as well as in Energy. Communication Paper had another strong performance, but profitability here was underpinned by a c.EUR90m timing benefit from electricity rebates and carbon credits. ...but cash generation should continue to improve in 2024 From EUR1bn in 2023, capex is set to fall to EUR550m in 2024. This includes the final EUR300m for the Leuna biochemicals plant before it starts operations at the end of 2024. As a result, excluding one-time working capital inflow in 2023, we see accelerating free cash flow in 2024-26. For now, we exclude the potential cost and benefit of the possible Rotterdam biorefinery project, pending greater clarity on i) likelihood of happening, ii) returns - though we think 14%+ ROCE if announced. Trimming DCF-derived target price to EUR35 - reiterate Outperform We lower op EBIT 33% in 2024 reflecting the unusually high planned maintenance in key assets, and by a more modest 10% in outer...
Adj . EBIT 20-30% below (energy refunds and maintenance ). Paper is late-cyclical. SOTP points to EUR ~44/sh incl. growth projects.
UPM will report its next quarterly results on 1 February. We reiterate BUY with a TP of EUR 38. Q4 2023e EBIT of EUR ~303m.
3Q beats but trimming numbers on updated price outlook UPM''s Q3 comparable EBIT fell 72% year-on-year but came in 16% ahead of consensus driven by beats in the Communication and Specialty Paper segments more than offsetting a shortfall in Fibres (pulp). Paso de los Toros and OL3 are now running close to nominal capacity and the Leuna biorefinery is on track with its (admittedly previously revised) build. Anticipating soft volume trends persist and moderating our price assumption outlook in Fibres and Energy though, we trim our above-consensus forecasts and target price accordingly. However, offering a 7% 2024 FCF yield, rising to 9% in 2025 we continue to see upside and reiterate our Outperform rating. New volume helps offset weak prices... Fibres (pulp) volumes rose 35% qoq with the new BEK pulp mill (PdlT) achieving 70% of nominal production capacity whilst Energy deliveries rose 27% yoy with the second full quarter''s benefit from nuclear power station OL3. These helped offset the sharp decline in pulp prices whilst pulp production costs fell 24% per tonne qoq as the new low-cost pulp mill increased its share of the mix and some underlying costs started to ease. ...but Paper segments were the surprise point of strength Despite continued weak volumes Communication Paper and Specialty profits rose qoq as production costs fell as a result of lower input costs. Given the lagged effect from pulp we expect continued benefit into Q4 and early 2024. Trimming DCF-derived target price to EUR36 (from EUR37) - reiterate Outperform FY23 capex guidance has increased slightly but management reassuringly reiterated a sharp fall for FY24+. No decision has been made on the Rotterdam biofuels project but retiring CEO Jussi Pesonen reiterated his view that the opportunity looks promising. For those meeting management soon, see inside for suggested questions.
Clean EBIT 13% above - much better on Paper. Trying to find a higher trough. SOTP points to EUR 45/sh incl. growth projects.
UPM reported weak Q3 results despite profitability exceeding the street’s expectations. Besides a strong rebound in sequential profitability after a poor Q2, there were various promising takeaways/dynamics in most divisions. While the firm is set to see a change of CEO in early-2024 – after a good run of nearly 20 years under the out-going CEO – this transition is not a worry, as UPM is on a front-footing (vs. peers) in various key aspects. Hence, its quality proposition remains attractive, despite the looming market fears/uncertainties.
UPM will report its next quarterly results on 24 October. We reiterate BUY with a TP of EUR 36.5 (34). Q3 2023e EBIT of EUR ~200m.
High costs and ongoing destocking drives 42% Q1 EBIT miss vs consensus UPM''s Q2 comparable EBIT fell 70% year-on-year. Raflatac (labels) saw the biggest revenue miss, whilst profits fell short in Fibres (pulp), Energy and Other (biorefinery) segments due to lower volumes and higher costs in particular, though encouragingly these are starting to roll over. Operationally the biggest disappointment is a year''s delay and cost overruns at Leuna, but against this the new Uruguay pulp mill is ramping up according to plan whilst group capex requirements are falling. We lower EPS 9-47% and DCF-derived target price slightly but, on 10x 2024 PE, we see attractive fundamental value and reiterate our Outperform rating. Weak underlying volume trends persisting but new capacity starting to ramp up... Volumes fell 30% yoy in Plywood and 12% in Communication Paper but most notable was the 25% revenue decline in Raflatac, or c.32% on an organic basis on our estimates. More encouragingly, Fibres volumes rose 60% yoy or 10% yo2y (stripping out the impact of last year''s strike) as the Paso de los Toros mill began operations. Management has confirmed full output should be achieved by the end of 2023, with the USD280/tonne delivered production cost reconfirmed. ...whilst costs remaining high, but are now starting to fall Fibres production costs rose a further 4% qoq but encouragingly management sees Finnish wood costs stabilising from here. The fallen pulp price should also feed into a cost tailwind to paper divisions in 2H. Hence, we see UPM''s guidance for 2H comparable EBIT ''to be on a similar level or increase'' versus H1 to be potentially conservative, though much depends on the end of destocking pressures and market prices. We model a flat pulp price of c.USD505/tonne to year end. Trimming DCF-derived target price to EUR35 - reiterate Outperform The Leuna biochemical project cost has jumped EUR430m but the 14% project ROCE reiterated and overall group capex...
Clean EBIT -32% below consensus. Pulp and Paper prices could drop 20-30%. SOTP points to EUR 46/sh (growth projects).
Even UPM reported poor Q2 results – with a major profitability miss vs. the street’s expectations owing to various issues across the board. Finally, the guidance was slashed and the management even materially revised upwards the cost of developing a key growth asset. While the situation seems tough, by virtue of its balance sheet strength, impressive (cost savings) track-record and limited forest and wood market dependencies, UPM remains a quality sector bet.
Feedback from BNPP Exane''s Future of Packaging Conference: 15 - 17 May 2023 We hosted a dozen companies at our 3rd annual Future of Packaging Conference, spanning upstream forest owners and pulp producers through downstream converters, packaging buyers and ESG experts. Short term focus was on destocking trends and the volatile cost and selling price environment, whilst mid-term topics included industry (over)supply risks and sustainability tailwinds. Short term: investors demanding answers on demand Following on from the recent profit warnings at Stora Enso and UPM, upstream companies were wary to ''call'' the end of destocking pressures, though conviction remains that this has generally been the incremental driver rather than underlying demand deterioration. On pricing, there are tentative signs of stabilisation in pulp and board, whilst downstream operators are either still pushing through increases to offset 2022''s cost increases, stable or, in the case of box prices, softening. Mid-term: all eyes on supply The strong pipeline of: new pulp mills, including UPM''s new site in Uruguay; containerboard mills including Mondi''s Italian site and new machines producing various consumer board grade lines (Mesta Board, others) was a key focus for investors worried about structural over-supply. Near-term though, fallen prices and high fibre costs mean some operators indicated they, or peers, are likely to take downtime in 2023. In Paper, UPM and Holmen continue to play the ''last man standing'' strategy, taking the view their low-cost Nordic energy provides advantage over Continental rivals. Sustainability: green shoots but not a game-changer Most companies talked to their opportunities in shifting packaging demands, including Mondi in flexibles, Graphic Packaging in foodservice, Huhtamaki in both areas, Elopak in liquid packaging and DS Smith and Smurfit Kappa in corrugated. Where, on the rare occasions, this was quantified though it typically represented...
UPM STERV SMDS VID VID MNDI SKG
Welcome to BNPP Exane''s Future of Packaging Conference: 15 - 17 May 2023 This year marks the 3rd year of our Future of Packaging Conference, but the first to include physical meetings in London alongside virtual sessions. Companies attending span the full value-chain from forest, through pulp and board, to packaging producers and buyers as well as sustainability experts. Near term debates are likely to focus on the rapidly turning inventory and price cycles whilst mid-term topics include life post the Russia embargo, capital cycles and, fibre''s role in future packaging solutions. The guide provides a snapshot profile and question bank for each company participating. Hosting leaders and experts from across the board The conference also provides investors the opportunity to unwrap the company-specific stories within the forestry, paper and, in particular, packaging industries. This year we are delighted to host: DS Smith, Elopak, Graphic Packaging, Holmen, Huhtamaki, Metsa Board, Mondi, Smurfit Kappa, Stora Enso, UPM-Kymmene and Vidrala, plus a major packaging buyer and a Life Cycle Analysis expert. The near term: Destocking with prices dropping 2023''s biggest theme so far has been ongoing pressure on demand as customers through the value-chain continue to destock on softening underlying macro trends, reduced safety stock post 2022''s supply chain crises, and in anticipation of further price falls. Meanwhile prices have reversed sharply in containerboard, timber and pulp though boxes have been resilient (so far) and input wood costs stubbornly high. A month after Q1, our conference should allow us to see if the situation is stabilising. The mid-term: capital cycles, cash uses, sustainability challenges and opportunities dominate Several companies are in the midst of completing major capital cycles - individually positive to PandL''s from increased sales capacity but in aggregate a potential over-supply risk for the industry. Balance sheets are...
Destocking drives 32% Q1 EBIT miss UPM''s Q1 comparable EBIT rose 29% yoy as the company lapped the impact of strikes in Finland last year, but still came in 32% below consensus expectations with a shortfall in all major divisions. In turn this was largely due to a shortfall in sales which management attributed to customer destocking. Nevertheless, softer demand and a sharper fall in commodity prices like pulp drive us to lower comparable EBIT forecasts 9-35%. Assuming recovery in the mid-term this results in a more modest cut to our DCF-derived target. Lacking conviction in pulp prices finding a bottom, low visibility of energy profits and concerns about communication paper profit sustainability we stay Neutral. Pulp prices falling faster than even previous bear case scenarios In just the four weeks since we initiated coverage of the sector global pulp prices have fallen c.22%, ahead of even the most bearish market commentator forecasts, as softer global demand has met significant major increases in new supply. Meanwhile Nordic pulpwood price increases show no signs of abating. UPM is partly exposed to these higher costs. However, the ramp up of its Paso de los Toros mill, which should add c.50% to its pulp output by the end of 2023, means we estimate the group reaching c.55% self-sufficiency in wood from forests and plantations it owns. Communication paper headwinds building again but OL3 provides more power to sell Despite Communication Paper volumes declining 15% yoy, EBIT was stable due to strong price increases over the last 12 months. However, prices are starting to fall again (-4% qoq) and we anticipate profits decreasing from Q2 onwards. In Energy, after some initial delays, the new nuclear power station began output in mid-April, adding c.50% of UPM''s surplus power to sell onto the Nordpool grid. However, with grid prices falling faster than the forward curve previously predicted, we lower our profit forecasts for the division....
2023 began on a weak note, with the Q1 results missing street expectations. Normalisation in legacy paper was glaring but inevitable. While there were some vulnerabilities in non-legacy paper divisions as well, their underlying dynamics remain reassuring. Also, with sustained dominance in legacy paper, UPM could capitalise any further shortages, besides pursuing further opportunistic curtailments/conversions. UPM remains our top sector-bet, also thanks to its cost optimisation capabilities, strong balance sheet, and (much-)lower exposure to forest and wood markets.
Despite Q4 sales missing street expectations, UPM has managed good results, which is also reflected in a major dividend increase – despite aggressive capex. Moreover, unlike peers, a promising 2023 guidance was shared. While UPM’s share has been very resilient (vis-à-vis peers) over the past couple of months – also justifying its premium valuation, the kickstart of various growth initiatives and intact virtues for existing offerings implies that there’s more value on offer. Hence, our positive recommendation is re-iterated.
UPM reported ‘record’ Q3 results, with healthy performance dynamics across the board. While the promising 2022 outlook was maintained – despite the looming macro uncertainties – we still expect earnings growth/margins to normalise in the coming years. Nevertheless, by virtue of its presence/dominance in compelling businesses/markets, well-targeted growth investments, an enviable cost control track-record and a strong balance sheet – also helping sustain attractive dividend yield – the Finnish giant remains our preferred sector bet.
UPM 3Q22 Comparable EBIT rose 84% Y/Y to EUR779m, due to strong Energy, Raflatac (labels), Communication Paper, Biofuels and Fibre (Pulp) performance. With increased confidence in UPM ''Spearheads for Growth'' organic expansion, our upgraded UPM EUR2.2bn 2023e Comparable EBIT sits 7% ahead of street. Outperform with increased EUR44TP. 84% UPM 3Q22 Comparable EBIT growth As per UPM''s positive October 13 trading update (see: UPM: Positive profit warning), UPM 3Q22 Comparable EBIT rose 84% Y/Y to EUR779m, due to strong performance in UPM Energy, Raflatac (labels), Communication Paper, Biofuels and Fibre (Pulp) divisions. Our upgraded EUR2.2bn 2023e Comparable EBIT sits 7% ahead of consensus With increased confidence in successful UPM ''Spearheads for Growth'' organic expansion: 1) 1Q23e Uruguay pulp mill ramp-up and 2) end 2023e German bio-chemical start-up: our upgraded EUR2.2bn UPM 2023e Comparable EBIT sits 7% ahead of Infront Data 2023e consensus. UPM is net long energy, hence its profits are boosted by higher energy prices In 2021, UPM consumed 11.7 TWh of electricity and produced 14.0 TWh of electricity, giving 2.3 TWh ''net long'' electricity position. With new Finnish OL3 nuclear power reactor (Dec 2022) and UPM''s Paso de los Toros pulp mill (Q1 2023), this electricity ''net long'' will increase to over 7 TWh, boosting UPM 2023-25e profits if current elevated energy and electricity prices are sustained. Outperform with increased EUR44TP Confident of UPM''s ''Spearheads for Growth'' organic evolution from structurally challenged graphic paper to green growth in pulp, biofuels and bio-chemicals: reaffirm outperform with increased EUR44TP (from EUR40), based on unchanged 11x CY23 EV/EBIT.
Post market close yesterday, UPM issued a positive trading update, stating that 3Q22e Comparable EBIT will rise 84% Y/Y to EUR779m, 38% above Infront Data EUR564m Comparable EBIT 3Q22e consensus, due to strong performance in UPM Energy, Raflatac (labels), Communication Paper, Biofuels and Fibre (Pulp) divisions. Our upgraded UPM 2023e estimates of EUR2.1bn Comparable EBIT and EUR3.05 Comparable EPS sit 16% ahead of consensus. Reaffirm Outperform with (conservatively unchanged) EUR40TP ahead of October 25 UPM 3Q22e earnings. 38% 3Q22e consensus Comparable EBIT beat Post market close yesterday, UPM issued a positive trading update, stating that 3Q22e Comparable EBIT will rise 84% Y/Y to EUR779m, 38% above Infront Data EUR564m 3Q22e Comparable EBIT consensus, due to strong performance in UPM Energy, Raflatac (labels), Communication Paper, Biofuels and Fibre (Pulp) divisions. UPM is net long energy, hence its profits are boosted by higher energy prices In 2021, UPM consumed 11.7 TWh of electricity and produced 14.0 TWh of electricity, giving 2.3 TWh ''net long'' electricity position. With a new Finnish OL3 nuclear power reactor (Dec 2022) and UPM''s Paso de los Toros pulp mill (Q1 2023), this electricity ''net long'' will increase to over 7 TWh, boosting UPM profits if current elevated energy and electricity prices are sustained. We sit 16% ahead of 2023e consensus: Reaffirm outperform with EUR40TP Following UPM''s 3Q22e consensus beat with increased confidence in sustained elevated electricity prices and successful 1Q23e Uruguay pulp mill ramp-up, our upgraded UPM 2023e estimates of EUR2.1bn Comparable EBIT and EUR3.05 Comparable EPS sit 16% ahead of Infront Data 2023e consensus. Reaffirm Outperform with (conservatively unchanged) EUR40TP ahead of October 25 UPM 3Q22e earnings.
UPM-Kymmene has reported extraordinary preliminary performance figures for Q3 22. These are enviable numbers for a Europe-focused corporate – both in business and asset terms – especially at a time when many larger firms are battling serious challenges. While the detailed Q3 figures should be known in few days from now, it is clear that the business dynamics across most divisions were healthy. Overall, UPM remains our preferred sector bet, especially given its ability to withstand the current market challenges.
Yesterday, UPM hosted a Forest and Energy seminar. Attention focused on its ''net long'' electricity position, which will increase to over 7 TWh in 2023e, boosting UPM profits if current elevated energy prices are sustained. Confident of energy advantaged UPM''s evolution from structurally challenged graphic paper to green growth in pulp, biofuels and bio-chemicals we reaffirm Outperform with EUR38TP ahead of UPM October 25 3Q22e earnings. UPM is net long energy, hence its profits are boosted by higher energy prices In 2021, UPM consumed 11.7 TWh of electricity and produced 14.0 TWh of electricity, giving 2.3 TWh ''net long'' electricity position. With a new Finnish OL3 nuclear power reactor (Dec 2022) and UPM''s Paso de los Toros pulp mill (Q1 2023), this electricity ''net long'' will increase to over 7 TWh, boosting UPM profits if current elevated energy and electricity prices are sustained. UPM forest strategy: committed to biodiversity UPM has over 1m hectares of forest assets globally, valued at EUR3.2bn at FY21. While UPM forests supply 10% of its Finnish wood and the majority of its Uruguay wood needs, UPM is committed to net-positive biodiversity, harvesting less than 100% of forest growth, planting 50m trees annually. Uruguay pulp mill on track for 1Q23e ramp-up; Expect EUR600m+ EBIT contribution. UPM''s EUR3bn 2.1mT Uruguay pulp mill is on track for 1Q23e start. Post ramp-up, we believe this new pulp mill can contribute some EUR600m UPM comparable EBIT (or over EUR1,000m EBIT, if current pulp prices were maintained). Outperform with EUR38TP ahead of October 25 3Q22e earnings With UPM Energy''s ''net long'' energy position, sustained higher electricity prices give 4%/3% 2022/23e EPS upgrades. Confident of energy advantaged UPM''s evolution from structurally challenged graphic paper to green growth in pulp, biofuels and bio-chemicals we reaffirm Outperform with EUR38TP ahead of October 25 3Q22e earnings.
UPM reported 26% 2Q22 Comparable EBIT growth to EUR387m on July 21. With Uruguay pulp mill on track for 1Q23 ramp-up: We remain confident of UPM''s evolution from structurally challenged graphic paper to green growth in pulp, biofuels and bio-chemicals. Outperform with unchanged EUR38TP. 4% 2Q22 cons EBIT miss, due to slower than expected post-strike Finnish pulp ramp-up UPM EUR387m 2Q22 Comparable EBIT was 4% Infront Data consensus miss, due to slower than anticipated Finnish pulp ramp-up, following UPM''s January-April 2022 strike. Uruguay pulp mill on track for 1Q23e ramp-up; Expect EUR600m+ EBIT contribution. UPM''s EUR3bn 2.1mT Uruguay pulp mill is on track for 1Q23e start. Post ramp-up, we believe this new pulp mill can contribute some EUR600m UPM comparable EBIT (or over EUR1,000m EBIT, if current pulp prices were maintained). UPM is ''net long'' energy, hence its profits are boosted by higher energy prices UPM consume 11.7m TWh of electricity and produce 14.0m TWh of electricity annually. This 2.3m TWh UPM ''net long'' electricity, will increase by additional 3m TWh to 5.3m TWh ''net long'' post ramp-up of new Finnish OL3 nuclear power reactor in December 2022, hence UPM benefits from higher electricity / energy prices. Back on track, with spearheads in view: Outperform with unchanged EUR38TP Following Finnish strike resolution, with increased energy prices and Uruguay pulp mill on-track for 1Q23e ramp-up, UPM is firmly ''back on track''. Confident of UPM''s evolution from structurally challenged graphic paper to green growth in pulp, biofuels and bio-chemicals: reaffirm outperform with (unchanged) EUR38TP.
Again, on the back of stronger prices, UPM reported impressive Q2 results – although the performance fell short of street expectations. There were healthy contributions from most divisions, despite below-par deliveries – which were crippled by strikes, maintenance shutdowns and/or other disruptions. While macro risks are on the rise, management expects 2022 operating profits to exceed 2021 levels. Overall, UPM remains an attractive sector bet and, by virtue of asset holdings/exposure, it is better-positioned to navigate the respective market challenges.
Our Future of Packaging conference on May 23-25 provides an opportunity to hear from eleven European and US packaging companies on demand, cost inflation and pricing power in uncertain macro environment. Additionally, expect update on sustainability and circular economy trends (e.g. plastic to paper replacement). This Conference guide provides an overview of global packaging demand/pricing trends, details of companies presenting, with questions for management. BNPP Exane Future of Packaging Conference on May 23-25 The BNPP Exane Future of Packaging conference on May 23-25 provides an opportunity to hear from eleven European and US packaging companies on demand, cost inflation and pricing power in an uncertain 2022 global macro environment. Focus on 1) demand and 2) pricing power vs cost inflation With elevated macro and geopolitical uncertainty, expect focus on 2022 packaging demand outlook. Additionally, pricing power to relentless offset cost inflation (energy, raw materials, transport) is critical to 2022 profit growth. Sustainability and packaging innovation important to growth and profitability We seek an update on multi-year sustainability and circular economy trends (e.g. plastic to paper based packaging) supporting innovation and medium term profit growth. Conference guide with sector overview, timetable and questions for each company This conference guide provides an overview of global packaging demand/pricing trends, details of each company presenting at the conference, with questions for management.
UPM STERV ENC HUH1V SMDS VID MNDI SKG WRK ELO GPK ENC VID 0LW9
Despite the impact of the Finnish strike in many key divisions, UPM’s Q1 22 results came in well ahead of market expectations. Market dynamics in most divisions remain largely promising and, hence, the firm’s earnings seem resilient – which is also reflected in the management guidance. However, considering the brewing risks and challenges, particularly in Europe, some near-term performance pressure/restraint cannot be ruled out. Nevertheless, any sell-off should be capitalised on as an accumulation opportunity, given that UPM’s long-term projects and prospects remain promising.
EUR277m 1Q22 Comparable EBIT was a 24% consensus beat, due to Paper division return to profit (despite Finnish strike). Positively, following strike resolution, with increased graphic paper, pulp and wood prices, UPM reaffirmed unchanged 2022e outlook. Our upgraded 2022e estimates: EUR1,474m Comparable EBIT and EUR2.17 EPS sit 10%-12% above the street, but in-line with UPM guidance. With Uruguay pulp mill on-track for 1Q23e, we remain confident of UPM''s strategic evolution from challenged paper to green growth in pulp, biofuels and bio-chemicals. Outperform with EUR38 TP. 24% UPM Consensus 1Q22 Comparable EBIT beat UPM 1Q22 EUR277m Comparable EBIT was a 24% Infront Data consensus beat, principally due UPM''s Communication Paper return to profit, despite the negative impact of Finnish mill strike. Following strike resolution: positive 2022e demand/pricing outlook leads to upgrades Positively, despite EUR180-200m 1Q22 EBIT impact from Finnish mill-worker strike (now amicably resolved), following 74% Y/Y 1Q22 increase in European graphic paper prices and higher pulp/wood prices, UPM reaffirmed 2022e Comparable EBIT ''expected to be on similar level or higher than (EUR1,471m) in 2021'', some 10% above Infront Data (pre results) April 2022 consensus. Our upgraded UPM 2022e estimates sit 10%-12% above street (but in line with guidance) Our upgraded 2022e estimates of EUR1,474m Comparable EBIT and EUR2.17 Comparable EPS sit 10%-12% above Infront Data (April 2022 pre results) consensus, but in-line with UPM guidance. Green growth strategy intact: Outperform with EUR38 TP With the Uruguay pulp mill on-track for 1Q23e, we remain confident of UPM''s strategic evolution from challenged paper to green growth in pulp, biofuels and bio-chemicals. Outperform with EUR38 TP.
While UPM delivered 4Q21 consensus EBIT beat, flattered by a forest gain, cost pressures impacted underlying profitability. Due to supply chain issues, UPM''s ''Spearheads for Growth'' organic expansion projects in Uruguay and Germany are delayed, with increased costs. While disappointing, our confidence in UPM''s strategic evolution from challenged paper to green growth remains firmly intact. Post yesterday''s weakness, reaffirm Outperform with revised EUR38 TP. Forest revaluation flattered 4Q21 EBIT, but cost pressures impacted underlying profitability While 4Q21 UPM EUR461m Comparable EBIT was a consensus beat (due to EUR109m forest fair value gain), underlying profitability in Communication Paper, Speciality Paper and Raflatac was impacted by cost pressures (energy, raw materials, transport) and supply chain issues. UPM ''Spearheads for Growth'' delays in Uruguay and Germany, with increased costs Due to Covid-19 and supply chain issues, UPM''s new 2.1mT Uruguay pulp mill is delayed from H2 2022 to end Q1 2023, with 10% project cost increase from EUR2.7bn to EUR3.06bn. Positively: the projected USD280/t pulp production cash cost is unchanged. Additionally: the start-up of UPM''s German Bio-chemical plant is also delayed (due to supply chain issues) by 12 months, to end 2023. Our UPM 2022e EUR1.3bn Comparable EBIT sits 6% below street While improving pulp outlook gives modest 2022e upgrades, reflecting our cautious view of 1) cost inflation and 2) impact of on-going Finnish mill worker strike; our revised UPM 2022e EUR1.3bn comparable EBIT and EUR1.89 comparable EPS sit 6% below Infront Data consensus. Green growth strategy intact: Outperform with revised EUR38 TP While UPM''s ''Spearhead for Growth'' project delays with increased costs are disappointing, our confidence in UPM''s strategic evolution from challenged paper to green growth in pulp, biofuels and bio-chemicals remains firmly intact. Post yesterday''s weakness: reaffirm Outperform...
2021 ended on a strong note for UPM-Kymmene, with profitability exceeding pre-pandemic highs. This performance was led by all segments (particularly pulp and energy), except for legacy and speciality papers, and helped overshadow cost challenges. Moreover, despite an aggressive capex, the dividend and, hence, industry-leading yield was maintained. Even though management is confident of the 2022 market dynamics, cost escalation and delay at mega-pulp investment in LatAm has unnerved investors. However, we believe UPM still remains well-positioned to leverage respective market opportunities.
As confidence builds in 2022 1) Global pulp recovery, 2) Communication Paper return to profit and 3) UPM ''Spearheads for Growth'' delivery: expect UPM re-rating. We model EUR1.3bn UPM 2022e Comparable EBIT (in-line with street), rising to over EUR2.0bn in 2024e (22% UPM 2020-24e EPS CAGR). Outperform with increased EUR39 TP, ahead of UPM Q4 2021 results on January 27. UPM to benefit from 2022 pulp price recovery Global pulp demand fell in 2021, due to China de-stocking, leading to 30% Chinese pulp correction. However, Chinese pulp prices have risen 9% from November 2021 low, with 20% recovery in Chinese pulp futures and multiple pulp prices hikes announced for Q1 2022 globally. UPM is ''net long'' 1mT pulp: each 10% pulp price = EUR56m EBIT (4.5% 2022 EPS). UPM''s sensitivity to pulp recovery will increase with ramp-up of its new (Paso de los Toros) 2.1mT Uruguay hardwood pulp mill. UPM Spearheads for Growth to double UPM EBIT by 2024e UPM organic ''Spearheads for Growth'' projects (Uruguay pulp mill and German Bio-chemicals plant) will help double UPM Comparable EBIT from EUR0.95bn in 2020 to EUR2.0bn in 2024e (giving 22% UPM 2020-24e EPS CAGR), whilst maintaining modest (1x ND/EBITDA) financial leverage. Graphic paper price hikes to improve Communication Paper 2022 profitability UPM Communication Paper division was loss-making in 3Q21, due to increased energy costs. UPM (and industry peers) target c10-15% Q1 2022 price increases to return to consistent 2022 profitability. Pulp recovery and ''Spearheads for Growth'' delivery: Outperform with increased EUR39 TP As confidence builds in 2022 1) Global pulp demand/pricing recovery, 2) Communication Paper return to profit and 3) UPM ''Spearheads for Growth'' delivery, with 4) Continued appealing dividends: expect UPM re-rating. Reflecting our upgraded estimates: reaffirm Outperform with increased EUR39 TP (from EUR37), based on 12x CY23x EV/EBIT, ahead of UPM Q4 2021 results on January 27.
Despite legacy paper – continuing to witness structural headwinds – accounting for one-third of group sales, UPM reported ‘record’ Q3 results. They were largely driven by exceptional pulp results and well-complemented by energy and labels. While there’s a brewing industry-wide challenge in the form of normalising wood and forest earnings, UPM is fortunate enough to have limited exposure to these areas. Instead, its growth focus supports our expectation of a medium-term healthy margin progression and, hence, our positive stock recommendation is reiterated.
UPM EUR424m 3Q21 EBIT was 9% cons beat, principally due to (cycle peak) pulp prices. While higher energy prices boosted UPM Energy, Communication Paper was loss-making. Modelling 15% European pulp correction, we forecast EUR1.2bn UPM FY22e Comparable EBIT (8% below cons). As confidence builds in: 1) Global pulp stabilisation, 2) Communication Paper return to profit and 3) ''Spearheads for Growth'' delivery: expect UPM re-rating. Outperform with EUR37 TP. Record EUR424m 3Q21 EBIT: a 9% consensus EBIT beat 3Q21 EUR424m Comparable EBIT was 9% cons beat, due to (cycle peak) Biorefining pulp prices and Energy (higher electricity prices), offsetting Communication Paper loss (higher energy costs). Modelling a 15% pulp correction gives EUR1.2bn UPM FY22e EBIT: 8% below consensus UPM is ''net long'' 1mT pulp: each 10% pulp price = EUR56m EBIT (5% EPS). Modelling 15% European pulp correction: forecast EUR1.2bn FY22e Comparable EBIT, sitting 8% below street. Communication Paper EUR30m 3Q21 EBIT loss: additional paper price hikes targeted UPM Communication Paper was loss-making in 3Q21, due to increased energy costs. UPM (and industry peers) target additional paper price hikes to return this division to consistent profitability. UPM Spearheads remain on track and on-budget to double UPM EBIT by FY24e UPM organic expansion ''Spearheads for Growth'' projects (Uruguay Pulp mill and German Bio-chemicals plant) remain on-track to double UPM Comparable EBIT from EUR0.95m in FY20 to EUR2.0bn in FY24e (giving 22% UPM FY20-24 EPS CAGR). Confident of ''Spearheads for Growth'' delivery: Reaffirm outperform with EUR37TP As confidence builds in: 1) Global pulp demand/pricing stabilisation, 2) Communication Paper return to profit, 3) UPM ''Spearheads for Growth'' delivery, with 4) Continued appealing dividends: expect UPM re-rating. Reaffirm Outperform with EUR37 TP.
UPM-Kymmene reported strong results, largely driven by pulp – also the group’s biggest growth focus area. Apt support was provided by the high-margin non-paper divisions. While there were some issues in paper, management is well-positioned to leverage its past experience and market dominance to address the respective challenges gradually. Overall, UPM remains an attractive bet to play paper & packaging market’s long-term fundamentals.
UPM delivered 8% 2Q21 cons EBIT beat via increased pulp prices. Its organic ''Spearheads for Growth'' projects remain on-time and on-budget to double EBIT by FY24e. While modelling a 10% 3Q21 pulp correction, with confident demand outlook and 9% July 2021 paper price hikes: we upgrade FY21e Comparable EBIT to EUR1.3bn (5% ahead of cons). Outperform with EUR38 TP. 8% 2Q21 consensus EBIT beat UPM EUR307m 2Q21 Comparable EBIT was 8% beat vs EUR285m Infront Data consensus, principally due to increased pulp prices boosting Biorefining profits, with smaller beats in Energy and Raflatac (labels) offsetting Communication Paper losses. Spearheads remain on track and on-budget to double UPM EBIT by FY24e UPM Spearheads for Growth (Uruguay Pulp and German Bio-chemicals) remain on-time and on-budget. Due to Spearheads for Growth ramp-up, we expect UPM Comparable EBIT to double from EUR0.95m in FY20 to over EUR1.9bn in FY24e (giving 21% UPM FY20-24e EPS CAGR). Upgraded EUR1,305m FY21e Comparable EBIT sits 5% ahead of street Following 2Q21 beat, with positive outlook and 9% July 2021 European graphic paper price hikes (1% paper price = EUR32m UPM EBIT), we upgrade FY21e Comparable EBIT by 7% to EUR1.3bn, 5% ahead of Infront Data cons. However: 2021 may be the cyclical peak of pulp prices. Modelling a 10% pulp 3Q21 correction give cautious FY22e outlook Chinese pulp prices have fallen 13% since April 2021, we expect 10% European pulp correction in 3Q21, (see: Pulp correction), with a 10% pulp fall = cEUR56m annualised UPM EBIT. Reflecting our pulp correction view: we model EUR1.2bn FY22e Comparable EBIT, sitting 1% below street. Confident of ''Spearheads for Growth'' delivery: Reaffirm Outperform with EUR38TP As confidence builds in 1) Communication Paper stabilisation, 2) UPM ''Spearheads for Growth'' delivery, with 3) appealing dividends: expect UPM re-rating. Outperform with increased EUR38 TP.
UPM has embarked upon 2021 on a promising note. While legacy paper remains a concern, the firm remains well-equipped to continue restructuring efforts. Moreover, with strong fundamentals across all other divisions and various growth investments underway, UPM remains on track to transform its old school positioning as a European paper major. Although such measures require sizeable investments, its strong balance sheet allays any financing concerns and, at the same time, renders an apt cushion with respect to dividends.
We hosted French investor roadshow with UPM CFO Tapio Korpeinen. Three key points were: 1) UPM ''Spearheads for Growth'' organic expansion projects remain on track and on-budget to double UPM EBIT by FY24e. 2) Communication Paper demand stabilising, with modest 2021 price increases. 3) Despite Chinese pulp futures volatility, UPM confident of 2021 pulp profit recovery. Spearheads remain on track and on-budget to double UPM EBIT by FY24e UPM Spearheads for Growth (Uruguay Pulp and German Bio-chemicals) remain on-time and on-budget. Due to Spearhead for Growth ramp-up, we expect UPM Comparable EBIT to double from EUR0.95m in FY20 to EUR1.9bn in FY24e (giving 20% UPM FY20-24 EPS CAGR). Communication Paper demand stabilising, with modest 2021 price increases EU graphic paper demand fell 18% in 2020. Positively, with nascent return to office, UPM see 2021 graphic paper demand stabilising in -5% p.a. longer term decline range. Post mill closures, UPM confident of maintaining high mill operating rates, with modest 2021 graphic paper price hikes. Chinese pulp futures volatility, but UPM confident of pulp profit recovery US and European pulp prices has risen by 40% in 2021 YTD, mirroring recovery in Chinese pulp prices. However Chinese pulp futures have eased in recent weeks, currently trading at 12% discount to China pulp spot prices. While UPM remain confident of 2021 global pulp demand, we believe global pulp prices may have plateaued after recent gains. Modelling EUR1.2bn FY21e Comparable EBIT (in-line with street): Outperform with EUR37TP UPM''s guide that ''comparable EBIT is expected to increase both in H1 2021 compared with H1 2020, and in the full year 2021 compared with 2020''. We model 26% UPM FY21e comparable EBIT growth to EUR1.2bn, in-line with consensus. As confidence builds in: 1) Paper stabilisation, 2) UPM ''Spearheads for Growth'' delivery, with 3) Continued appealing dividends, we expect continued UPM re-rating. Reaffirm Outperform...
UPM 1Q21 highlighted strong label, specialty paper and energy demand with recovering global pulp prices. Our upgraded UPM EUR1.2bn FY21e Comparable EBIT sits in-line with the street. We believe UPM ''Spearheads for Growth'' remain on track to double UPM EBIT from EUR0.95bn in FY20 to EUR1.9bn in FY24e. Outperform with increased EUR37 TP (from EUR36). Limited UPM 1Q21 surprises, following April 15 pre-announcement On April 15, UPM pre-announced 1Q21 Comparable EBIT of EUR279m; hence yesterday''s actual 1Q21 results contained few surprises. UPM highlighted continued strong label, specialty paper and energy demand with recovering global pulp demand and prices. While cautious of paper: our EUR1.2bn FY21e Comparable EBIT sits in-line with the street While remaining cautious on UPM graphic paper demand and profitability, modelling 30% CY 2021 pulp recovery, our upgraded UPM EUR1,201m FY21e Comparable EBIT sits in-line with the street. Spearheads on track to double UPM EBIT from EUR0.95bn in FY20 to EUR1.9bn in FY24 UPM''s ''Spearheads for Growth'' (Pulp in Uruguay and Bio-chemicals in Germany) remain on-time and on-budget. Due to pulp recovery and Spearhead for Growth delivery, we model UPM Comparable EBIT doubling from EUR0.95m in FY20 to EUR1.9bn in FY24e (20% FY20-24 EPS CAGR). Post 8% FY21e EPS upgrade: Reaffirm Outperform with increased EUR37 TP Improving demand and prices leads to 8%/5% FY21/22e EPS upgrades. As confidence builds in: 1) Global pulp recovery, 2) UPM ''Spearheads for Growth'' delivery, with 3) Continued appealing dividends, we expect UPM re-rating. Reaffirm Outperform with increased EUR37 TP.
Late yesterday, UPM issued positive profit warning disclosing EUR279m 1Q21e comparable EBIT, 25% ahead of consensus, due to better than expected pulp, labels and graphic paper profit. Modelling 30% CY21 pulp price recovery, our upgraded UPM FY21e estimates of EUR1,118m comparable EBIT and EUR1.59 EPS sit 8% above street. See positive UPM read to pulp peers Stora Enso and SCA. Reaffirm UPM Outperform ahead of its 1Q21e results on April 27. Positive profit warning, disclosing EUR279m 1Q21e EBIT, ahead of formal April 27 1Q21e Ahead of formal 1Q21e results on April 27, UPM issued positive trading update yesterday, stating it will deliver EUR279m 1Q21e comparable EBIT, 25% ahead of EUR223m Infront Data 1Q21e consensus, due to better than expected pulp, labels and graphic paper divisional profitability. Modelling 30% CY21 pulp price recovery: our FY21e EBIT estimates sit 8% ahead of street UPM is ''net long'' 1mT pulp: each 10% pulp price = EUR56m annualised EBIT. Modelling 30% CY 2021 pulp recovery, our upgraded EUR1,118m FY21e Comparable EBIT sits 8% ahead of street. Spearheads on track to double UPM EBIT from EUR0.95bn in FY20 to EUR1.9bn in FY24 Expect April 27 update on UPM ''Spearheads for Growth'' (Pulp in Uruguay and Bio-chemicals in Germany) which we believe remain on-time and on-budget. Due to pulp recovery and Spearhead for Growth delivery, expect UPM EBIT will double to EUR1.9bn in 2024 (19% FY20-24 EPS CAGR). Reaffirm Outperform with EUR36 TP ahead of UPM 1Q21e results on April 27 As confidence builds in: 1) Global pulp recovery, 2) UPM ''Spearheads for Growth'' delivery, with 3) Continued appealing dividends, we expect UPM re-rating. Outperform ahead of April 27 1Q21e. Positive UPM read to Stora Enso and SCA With confidence in 30% 2021 European and US pulp recovery, at pulp makers Stora Enso, UPM and SCA; our FY21e EBIT estimates sit 4-8% ahead of consensus. For more, see our April 12 note: Unwrapping Q2 pulp and packaging...
UPM ended 2020 on a good note, with the Q4 performance witnessing meaningful (sequential) recovery and management deciding to maintain the dividend – despite ambitious growth plans being implemented. With various green shoots across (key) divisions and growth investments progressing well, we believe UPM remains an attractive sector bet. While the next few quarters could be tricky – due to re-emerging COVID-19 risks, market-aligned long-term vision plus a credible track record renders support to the investment case.
Post 31% 4Q20 cons EBIT beat, with maintained EUR1.30/sh dividend (4.3% yield), UPM''s Spearheads for Growth are on-track to double group EBIT to EUR1.9bn in FY24e. As confidence builds in 1) global pulp recovery 2) continued Communication Paper cash generation and 3) Spearheads for Growth delivery, expect UPM re-rating. Reaffirm Outperform with EUR36 TP. 31% 4Q20 cons EBIT beat, with maintained EUR1.30/sh dividend EUR252m 4Q20 EBIT was 31% beat vs EUR193m Infront Data cons, due Communication Paper, with smaller Energy, Raflatac (labels) and Speciality Paper divisional beats. Importantly: despite lower FY20 profits, with confident outlook: UPM maintained its EUR1.30 dividend (4.3% div yield). Modelling 15% CY21 pulp price recovery: our FY21/22e UPM ests are 5%/7% ahead of street UPM is ''net long'' 1mT pulp: each 10% pulp price = EUR63m annualised EBIT. Modelling 15% CY 2021 pulp recovery, our FY21/22e EBIT estimates sit 5%/7% ahead of street. UPM''s pulp sensitivity will increase post expected 2H22 opening of its 2.1mT Uruguay pulp mill. Spearheads on track to double UPM EBIT to EUR1.9bn in FY24 UPM ''Spearhead for Growth'' (Pulp in Uruguay and Bio-chemicals in Germany) are both ''well on track with the planned start-up timeline''. Due to global pulp recovery and Spearhead for Growth delivery, we model UPM EBIT doubling to EUR1.9bn in 2024 (giving 20% FY20-24 UPM EPS CAGR). Communication Paper managed for cash, will represent just 4% of FY24e EBIT UPM FY20 graphic paper volumes fell 19%, with EBIT down 53% to EUR180m (19% UPM FY20 EBIT). With Spearheads for Growth ramp-up, we model Communication Paper representing just 4% FY24e EBIT, with UPM continuing to exit paper capacity to maintain cash generation. Reaffirm Outperform with EUR36 TP As confidence builds in: 1) Global pulp recovery, 3) UPM ''Spearheads for Growth'' delivery, with 3) Continued appealing dividends: Expect 2021 UPM re-rating.
We model EUR197m UPM 4Q20 Comparable EBIT on Jan 28. Expect focus on recovering pulp prices, paper demand and UPM Spearheads for Growth projects. Post mill closures; expect stable 2021 graphic paper profit. As confidence builds in 1) global pulp recovery 2) paper stability and 3) Spearheads for Growth delivery, we expect UPM re-rating. Reaffirm Outperform with EUR36TP. Expect EUR197m UPM 4Q20 Comparable EBIT on Jan 28 We model EUR197m UPM 4Q20 Comparable EBIT (2% below EUR201m Infront data cons.). Expect focus on 2021 pulp and paper demand and update on UPM ''Spearheads for Growth'' projects. Modelling 15% CY21 pulp price recovery: our FY21/22e UPM ests are 2%/7% ahead of street UPM is ''net long'' 1mT pulp: each 10% pulp price = EUR63m annualised EBIT (7% of EPS). Modelling 15% CY 2021 pulp recovery, our FY21/22e EBIT estimates are 2%/7% ahead of street. UPM''s pulp sensitivity will increase post expected 2H22 opening of its 2.1mT Uruguay pulp mill. UPM exited 17% graphic paper capacity, reducing FY21e costs by EUR130m In 2020 UPM closed/sold 17% of its 7.3mT graphic paper capacity, reducing costs by EUR130m. Despite paper price falls, we expect stable FY21e Communication Paper profits, post mill closures. UPM ''Spearheads for Growth'' organic expansion into Pulp, bio-chemicals and biofuels Due to UPM''s ''Spearheads for Growth'' organic evolution into pulp, bio-chemical and bio-fuels we model EUR1.55bn p.a. FY21-22e capex helping finance EUR2.7bn Uruguay pulp mill and EUR0.55bn German Bio-chemical plant. Despite elevated capex, we expect peak 1.2x net debt/EBITDA at FY22e, with maintained EUR1.30/share annual dividends (4.2% dividend yield) in FY20-22e. Reaffirm Outperform with EUR36 TP ahead of UPM Jan 28 4Q20 results As confidence builds in 1) Pulp recovery, 2) Stable graphic paper profits and 3) ''Spearheads for Growth'' delivery, while maintaining appealing EUR1.30/sh dividends, expect 2021 UPM re-rating.
Unlike the peers, UPM’s Q3 results came in short of expectations. While operating margins did improve in sequential terms, with Communication Papers regaining profitability, the other divisions were a mixed bag. Overall, the group is yet to re-attain healthy performance levels. However, taking on board the diversity gains via non-paper growth investments, planned cost-saving measures, potential for (material) gains via revaluation of forests and balance sheet comfort, UPM remains our preferred sector bet.
UPM delivered 14% 3Q20 cons EBIT beat. Despite reduced volumes, 3Q20 saw welcome return to profit in graphic paper. As confidence builds in: 1) Global pulp recovery 2) Stabilising Communication Paper outlook, 3) UPM ''Spearheads for Growth'' delivery, while maintaining appealing dividend stream: We expect positive re-rating. We reaffirm Outperform with EUR31TP. 14% 3Q20 consensus EBIT beat Due to 21% fall in UPM graphic paper volumes and lower pulp prices: UPM 3Q20 Comparable EBIT declined 37% Y/Y to EUR215m (3Q19: EUR342m), but this was a 14% beat vs EUR188m Infront Data cons, principally due to a welcome return to profits in UPM Communication Paper which reported EUR19m 3Q20 Comparable EBIT. UPM closing 1.2mT graphic paper (17% capacity), reducing costs by EUR130m UPM has announced closure/sale of three paper mills (Kaipola, Shotton and Chapelle), 17% of its 7.3mT graphic paper capacity, targeting EUR130m annualised cost savings. Global pulp recovery boosts FY21e UPM Biorefining profitability Over past three months Chinese pulp prices have risen 5%, with falling pulp inventories at Chinese ports and Chinese pulp futures rising 8% from July 2020 lows supporting our view that Chinese (and global) pulp prices are at/near trough levels, boosting FY21e UPM Biorefining profit recovery. 4% FY20e EPS upgrade: Reaffirm Outperform with (SOTP-based) EUR31 TP 14% 3Q20e EBIT beat gives 4% FY20e EPS upgrade. As confidence builds in: 1) Global pulp recovery 2) Stabilising Communication Paper outlook, 3) UPM ''Spearheads for Growth'' delivery, while maintaining appealing dividend stream: Expect UPM re-rating. Outperform with EUR31TP.
UPM CMD focused on sustainability as a core driver of organic ''Spearheads for Growth'' expansion plans in 1) Pulp 2) Bio-chemicals and bio-refining and 3) Speciality paper and labels, targeting over EUR400m organic EBIT growth, while maintaining appealing dividends with modest leverage. UPM graphic paper mill closures and global pulp recovery lead to 9% FY21e EPS upgrade. As confidence builds in: 1) Global pulp recovery 2) UPM ''Spearheads for Growth'' delivery with 3) appealing dividends: We expect UPM re-rating. Reaffirm Outperform with increased EUR31TP. Sustainability focus CMD UPM hosted a CMD on its three key organic ''Spearhead for Growth'' plans in 1) Pulp 2) Bio-chemicals and bio-refining and 3) Speciality paper and labels. Post full ramp-up: UPM target additional EUR2bn revenue and over EUR400m organic EBIT growth, while maintaining appealing dividends (EUR1.30/sh in FY19) with modest leverage (we forecast peak ND/EBITDA of 1.1x at FY22e). UPM closing 1.2mT graphic paper (17% capacity), reducing costs by EUR120m UPM has announced closure/sale of three paper mills (Kaipola, Shotton and Chapelle), 17% of its 7.3mT graphic paper capacity, targeting EUR120m annualised cost savings. Global pulp recovery boosts FY21e UPM Biorefining profitability Over the past month Chinese pulp prices have risen by 3%, with falling pulp inventories at Chinese ports and Chinese pulp futures rising 9% from July 2020 lows, supporting our view that Chinese (and global) pulp prices are at/near trough levels, boosting FY21e UPM Biorefining profit recovery. 9% FY21e EPS upgrade: Reaffirm Outperform with increased (SOTP-based) EUR31 TP UPM graphic paper mill closures and global pulp inflection leads to 9% FY21e EPS upgrade. As confidence builds in: 1) Global pulp recovery 2) UPM ''Spearheads for Growth'' delivery with 3) appealing dividends: We expect UPM re-rating. Reaffirm Outperform with increased EUR31TP.
Compared with the sector, COVID-19 has taken a bigger toll on UPM-Kymmene, largely due to its material conventional paper exposure. However, given management’s impeccable past record in both restructuring (inefficient) capacities and slashing costs, generation of meaningful stakeholder returns, and pursual of growth investments (outside paper), we believe that another revival of fortunes is possible. Remember, the group’s balance sheet flexibility and sizeable redundant paper capacities render ample headroom for foray/conversion into better-prospect areas.
UPM has underperformed European pulp and packaging peers in 2020 YTD on fears regarding paper demand/pricing impacting profits, dividends and its ''Spearheads for Growth'' expansion plans. Post yesterday''s fireside chat with UPM CFO, we are reassured on likely paper mill closures to protect profits, on-going pulp price stabilisation (pulp futures +6% M/M) and continued UPM dividends. Ahead of forthcoming UPM Sept 9 CMD: Reaffirm Outperform with EUR29TP. Exane hosted fireside chat with UPM CFO Tapio Korpeinen While our fireside chat did not provide any material new disclosure (unlikely ahead of UPM Sept 9 CMD), CFO Tapio Korpeinen reaffirmed UPM''s longer term strategy of 1) Paying appealing dividends 2) Organic growth via ''Spearheads for Growth'', with 3) modest financial leverage. Expect 4Q20 UPM paper mill closures to rebuild Communication Paper profitability Covid-19 accelerates structural decline in graphic paper use. In response, UPM has closed its Chapelle newsprint mill. We expect additional 4Q20 UPM paper mill closures (potentially with UPM 3Q20 results on October 27), to balance reduced supply to ''new normal'' of c20% lower CY 2020 graphic paper demand, rebuilding UPM Communication Paper profitability. We believe pulp prices at/near trough, supporting UPM Biorefining FY21e profit recovery While ''calling the trough'' of any global commodity such as pulp is part sentiment as well as economic supply/demand fundamentals, with 1) Chinese pulp futures up 6% M/M and 2) global pulp inventories revised lower and 3) several announced pulp price hikes: we believe Chinese (and global) pulp prices are at/near trough levels, supporting FY21e UPM Biorefining profit recovery. Ahead of UPM Sept 9 CMD: Reaffirm Outperform with (SOTP-based) EUR29 TP As confidence builds in: 1) UPM (and peers) paper mill closures to protect profit; 2) Pulp recovery post Covid-19; 3) UPM ''Spearheads for Growth'' delivery; with 4) Continued appealing dividends: We...
After a weak Q1, UPM’s performance severity aggravated in Q2. The situation was complicated by extreme COVID-19-induced pressure in conventional paper – also the group’s biggest division (c.33% of sales). However, taking into consideration management’s prowess to (effectively) deal with paper market challenges, and the potential of on-going transformational projects and pandemic-triggered gains for various divisions, our recommendation should be maintained.
UPM delivered 13% 2Q20 cons EBIT beat, due to strong labels and pulp performance. While Covid-19 accelerates structural decline in graphic paper and defers pulp recovery, UPM strategy is unchanged: Appealing dividends with self-financed ''Spearheads for Growth'' organic expansion. Reaffirm Outperform with revised 29TP. 13% UPM 2Q20 cons EBIT beat Due to 29% fall in 2Q20 communication paper volumes and lower global pulp prices: UPM 2Q20 EBIT declined 41% to EUR203m, but this was a 13% beat vs EUR180m cons, with key divisional beats in Raflatac (labels) and Biorefining (Pulp). H2 paper and pulp challenges lead to 5% FY21e downgrade. We sit 9% below street Covid-19 accelerates structural decline in graphic paper use. In response, UPM has closed its Chapelle newsprint mill. Expect further H2 2020 UPM paper mill closures. Also, reduced paper related pulp demand defers pulp recovery until 2021. Reflecting these challenges, we cut FY21e EPS 5%. Our FY21e ests: EUR988m comparable EBIT and EUR1.42 EPS sit 9% below street. Unchanged strategy: Appealing dividends and self-funded ''Spearheads for Growth'' expansion While Covid-19 impacts FY20/21e profits, expect unchanged UPM strategy of: 1) Pay appealing dividend of 30%-40% of operating cash flow (EUR1.30/sh dividend in FY19). 2) Organic growth via ''Spearheads for Growth'', with 3) modest financial leverage (target net debt/EBITDA 2x). Reaffirm Outperform with revised SOTP-based TP of EUR29 (reduced from EUR30) As confidence builds in: 1) Global pulp recovery post Covid-19, 2) UPM ''Spearheads for Growth'' delivery, with 3) Continued appealing dividend stream: Expect UPM re-rating. Reaffirm Outperform with revised (SOTP based) EUR29 TP (reduced from EUR30).
UPM also embarked upon 2020 on a weak note. There was a pertinent (profitability + cash flow) weakness at the group level. Fortunately, the divisions with packaging credentials did well, while the net cash position was maintained. Although the performance is likely to erode further in the coming quarters, UPM by virtue of its balance sheet resilience and other underlying strengths should do reasonably well.
Despite material pulp market headwinds, especially in Q4 19, UPM reported stable full-year results. The turnaround in paper and energy, along with sustained cost optimisation, rendered meaningful support. Moreover, UPM now has two sizeable high-growth projects – in pulp and biochemicals – underway, and its strong balance sheet position should render a valuable cushion. Although the brewing (Coronavirus-induced) macro uncertainties is a (near-term) cause for concern.
Even though market conditions have become tougher, UPM managed to limit its Q3 business impact via effective cost savings. Interestingly, management has guided to maintain its 2019 performance at a good level. Continuation of paper rationalisation and the pursual of high-potential growth opportunities adds to the group’s overall investment attractiveness.
Q2 results came as no surprise as profit normalisation – after excessive gains in 2018 – is slowly materialising. Even though pulp markets/prices are expected to soften further in the coming years due to evolving demand-supply dynamics, pulp’s long-term prospects remain sacrosanct – reflecting UPM’s decision to invest $2.7bn in a new pulp mill in Uruguay. Through a combination of sustained restructuring measures and non-paper growth investments, UPM is gradually expected to reduce its legacy paper division dependence.
2019 began on a strong note for UPM-Kymmene. Healthy performances were sustained across all divisions, with the exception of Speciality Paper – where the scope for meaningful recovery still remains. While management guides for the secular decline of conventional paper to be sustained, it remains focused on niche, though high-potential, growth opportunities. These efforts should be backed by UPM’s undisputed balance sheet strength. Moreover, cost optimisation measures, in which the group has an impressive track record, are likely to continue.
The year 2018 ended on strong note, with healthy operating earnings across divisions – excluding Specialty Papers – being further complemented by material forest revaluation gains. As a consequence, profits soared to record-highs – despite growing cost pressure, and the balance sheet resilience was maintained. Now, the next leg of growth should come from (transformational) investment plans – with a net cash position lending a more-than-needed financing cushion.
While UPM’s Q3 results were healthy, they were somewhat capped by temporary disruptions. Price movements were positive across divisions, with pulp and energy being big beneficiaries. However, as some of pulp’s recent gains seem to be driven by transient events, some medium-term pricing normalisation seems inevitable. Nevertheless, improvements/stability in the smaller divisions should continue. With fundamentals remaining strong, the recent sell-off offers an attractive entry point.
The Q2 results were in line with the Street’s expectations on the back of better prices across divisions, despite lower volumes, higher costs and the material maintenance shutdown impact. While pulp and paper’s market tailwinds should continue in the near term, even other divisions should perform well – given the supportive market environment. Despite the brewing inflationary pressure and eventually normalising margins, the group should manage to maintain its robust cash flows and, hence, its strong balance sheet position and industry-leading dividends.
The Q1 18 results were supported by pricing improvements across divisions. However, the gains were partly capped by higher costs and lower deliveries. While the benefit of healthy pulp prices could continue in 2018, some normalisation should get underway 2019 onwards. Moreover, a tricky cost environment and the continuation of a volume weakness in Communication Papers are an added burden. While UPM has a strong balance sheet, this advantage (so far) hasn’t been leveraged optimally.
After beating the street’s estimates in Q1 17, UPM-Kymmene’s Q2 17 performance fell short of expectations – especially in profitability terms. Sales (again) were almost flat (+0.8% yoy; -0.7% qoq) at €2.5bn, as gains in Biorefining (+12% yoy, +3.8% qoq; driven by price improvements), Speciality Papers (+4.6% yoy, +3.6% qoq; yoy helped by a better product mix and qoq by volumes), Raflatac (+4.2% yoy, +1.1% qoq; benefiting from higher volumes) and Plywood (+7.6% yoy, +3.2% qoq; also benefiting from higher volumes) was offset by the still ailing Paper ENA (-3.7% yoy, -3.1% qoq; dragged by both lower prices and volumes) and Energy (-20% yoy, -19% qoq; on account of longer than normal maintenance shutdowns and still feeble prices) divisions. Adjusted EBIT declined 5.6% yoy (and 17% qoq) to €237m, as heavy maintenance activity (details in the ‘Analysis’ section) resulted in subdued deliveries, higher fixed costs and lower operational efficiency. Although, healthy gains from the change in fair value of forest assets (€32m vs. €11m in Q2 16 and €16m in Q1 17) and lower net interest costs (€6m vs. €15m in Q2 16 and €13m in Q1 17) resulted in net attributable profit of €205m (+3.5% yoy; -15% qoq). Apart from weakening operating profits, higher working capital use (€60m vs. a release of €10m in Q2 16 and €36m in Q1 17) exerted further pressure on reported OCFs (down 38% yoy and 32% qoq to €269m). This, along with capex of €54m (though down 43% yoy and 18% qoq) and full-year dividend payments of €507m, resulted in net debt increasing (21% vs. Q1 17 end) to €1.3bn. Management announced new investment projects worth €36m to expand: 1/ Kaukas pulp mill capacity by debottlenecking the existing capacity; and 2/ special label capacity in Finland. Apart from Q3 17 maintenance activity expected to be significantly lower compared with Q2 17, management expects to recognise c.€65m of gains from sale of hydropower facilities (announced in H1 17) in Germany, Austria and the US. On 7 August 2017, UPM announced the acquisition of US-based Southwest Label Stock, a supplier of self-adhesive label materials, for an undisclosed amount.
UPM-Kymmene’s Q4 16 results came in ahead of our estimates. Overall, the full-year (FY16) results were impressive, with profit improvements being the key highlight. Top-line remained lacklustre Sales: Q4 – €2.5bn (-3.8% yoy; +1.3% qoq); FY16 – €9.8bn (-3.2%; broadly in line with AV estimates) Weak Q4 volumes (-4.7% yoy; flat qoq) and price pressure (flat yoy in the euro area, though down 3% overall; -1% qoq) continued to weigh on Paper ENA’s sales (-6.3% yoy; -0.5% qoq). Except for a sequential price rebound (+8%), the situation in Energy (-18% yoy; +1.1% qoq) was very similar, as volumes (-7.9% yoy; -4.2% qoq) and prices (-8% yoy) remained weak. For Biorefining (i.e. pulp), despite reasonable volumes (+3.1% yoy; -2.1% qoq), oversupply-induced price weakness (-12% yoy; flat qoq) resulted in sales declining (-8.7% yoy; -1.5% qoq). These Q4 divisional trends reverberated throughout FY16, thereby more than offsetting the resilience in Special Papers (i.e. Paper Asia) and Raflatac (i.e. labels). Another cost-savings-driven FY performance Adjusted EBIT: Q4 – €229m (-0.9% yoy; -25% qoq); FY16 – €1,050m (+30%; +6.3% ahead of AV estimates) The fact that Q4 profits were relatively weaker was not a surprise as management had already guided for a maintenance shutdown impact in pulp and negative seasonality effects. Also, given that the Q3 profitability was exceptionally strong (especially in Paper ENA), normalisation was a given. Keeping aside these factors, the profitability rebound in paper – primarily on the back of cost savings – continued to impress. On an FY basis, barring pulp and energy (which have been marred by tough markets), all divisional performances (paper in particular) were healthy. Mimicking the operating performance, Q4 net profit came in at €187m (-3.1% yoy; -30% qoq). For the full year though, despite the lack of sizeable forest revaluation gains, net profit was down only 3.9% to €880m. This was not the case for Stora, where a combination of weakening operating profits and fair valuation losses on operating assets blemished its full-year bottom-line. Dividends backed by a strong balance sheet Healthy profitability along with working capital releases culminated in strong reported OCFs of €405m (+3.8% yoy; -20% qoq) and €1.7bn (+42%) for Q4 16 and FY16, respectively, while completion of most growth investments resulted in conservative (-19% yoy) full-year capex (€351m). Net debt declined 22% (vs. Q3 FY16-end) to €1.4bn. As a result, the group declared a generous dividend of €0.95/share (+27% yoy; 13% ahead of the AV estimate).
Yet again UPM-Kymmene has posted operating results materially ahead of the consensus and AV’s expectations. Q3 16 sales came in at €2.4bn (-3.4% yoy; flat qoq). Despite 7.2% higher Asian paper volumes (driven by the ramp-up at Changshu), the continued weak pulp and energy prices (both down 14%) and a challenging European paper environment (prices and volumes down 2% and 2.9%, respectively) weighed on the top-line. However, a sequential rebound in energy (+6.9%) and European paper (+6.6%) volumes, and pricing improvement/stability (across most divisions) cushioned this somewhat. Profitability improvements continued unabated with an adjusted EBIT of €305m (+41% yoy; +22% qoq) translating into a record operating margin of 12.5%. Paper ENA again surprised (adjusted EBIT came in at €112m vs. €8m in Q3 15 and €45m in Q2 16) on the back continuous cost savings, favourable comps (as Q3 15 had been marred by unfavourable currency hedges) and seasonal benefits. Growth investments in Paper Asia and Raflatac (labels) – benefiting from growing volumes and/or an improving product mix – too witnessed a healthy profitability progression. Even though profitability in Biorefining (-23% yoy; -5.3% qoq) and Energy (-33% yoy; +36% qoq) suffered again due to weak prices, sequentially there was some relief. Operating improvements percolated down, with net income coming in at €268m vs. €408m in Q3 15 (which included €289m of forest revaluation gains) and €198m in Q2 16. Strong reported OCFs of €506m (+39% yoy; +17% qoq) and conservative capex (given that most growth investments are already through) resulted in net debt being further reduced (down 20% vs. end Q2) to €1.8bn. Management guides Q4 16 performance to be negatively impacted by seasonality, and maintenance activity in Biorefining (pulp) and Paper ENA.
UPM-Kymmene’s Q2 results (barring the top-line) were ahead of consensus and AV expectations. While Paper ENA continued to suffer from the ire of weak prices (-2%) and volumes (-5.2%), lower pulp prices (-12%) and sombre energy market dynamics (prices and volumes down 13% and 5%, respectively) exacerbated the sales pressure (€2.4bn; -4% yoy). Although sequentially sales were flat due to volume support from Raflatac (labels), Paper Asia and Plywood. Despite the top-line vagaries, UPM’s profitability delivery remained strong. Adjusted EBIT came in at €251m (+34% yoy; -5.3% qoq). All divisions, with the exception of Biorefining (pulp) and Energy, witnessed meaningful improvements. These improvements were a combination of initiation of/pick-up in earnings contribution from the growth projects and strong delivery on (fixed and variable) cost savings. However, bottom-line gains mellowed (net profit of €198m; +24% yoy; -13% qoq) due to: 1/ lower gains from revaluation of biological assets; and 2/ higher income taxes. Cash flows remained healthy, both yoy and qoq. Reported OCFs came in at €434m (+34% yoy; +27% qoq). Even after the full-year dividends payments in Q2, UPM’s debt remained largely unchanged at €2.3bn. Management guides for profitability improvements to continue in H2 16 on the back of the incremental contribution of growth investments and the continuation of cost rationalisation.
UPM-Kymmene’s start to 2016 could not have been better with the profitability coming in materially ahead of the Street’s expectations. Although sales were a bit disappointing having declined 1.6% yoy (and 5% qoq) to €2.4bn as European paper volumes (down 2% yoy and 8.7% qoq) continued to sag, with sequential weakness being aggravated by lower pulp and energy prices, and seasonally lower label volumes. However, a material turnaround in the paper ENA and continuation of the good performance in pulp and labels (better margins) helped adjusted EBIT surge by 37% (and 15% qoq) to €265m – a record high. Paper ENA’s EBIT came in at €46m vs. €5m and €18m in Q1 15 and Q4 15, respectively, due to a combination of (fixed and variable) cost savings and the absence of unfavourable currency hedges (unlike the previous periods). Overall, a combination of cost efficiencies (across businesses) and the contributions from growth projects helped profitability gain momentum, after a subtle 2015. Net profit galloped 46% (and 18% qoq) to €227m (despite €29m of charges related to the closure of the Madison Paper Industries JV) and reported OCFs came in at €341m vs. €108m in Q1 15. Although OCF comps were skewed by a one-off working capital use of €147m in Q1 15 vs use of only €14m in Q1 16. UPM’s use of leverage continued to reduce, with net debt reaching another record low of €2.2bn (-8.9% qoq). On the day of the Q1 results release, the group also announced sale of its Schwedt newsprint mill (c.3% of capacities) in Germany to LEIPA group for a consideration of €70m – which is line with our NAV estimates.
UPM-Kymmene ended 2015 on a high with its Q4 and 2015 results exceeding AV and consensus estimates. These results fructified in spite of paper (a key outperformer in 2014) failing to deliver in 2015. *Some top-line growth* Sales: Q4 – €2.6bn (+1.7% yoy; +1.7% qoq); 2015: €10.1bn (+2.7%; +1.5% ahead of AV estimates) Q4 sales were supported by solid growth in Biorefining (pulp; +21%) and Raflatac (labeling; +10%) where a materially weaker Euro (down 14% vs. USD) was the key driver, despite persistent weakness in paper volumes and prices, energy prices and plywood volumes. With feeble European paper being a top-line drag since 2013, UPM finally achieved top-line growth with trends similar to Q4 resonating throughout 2015. *Highest annual EBIT since 2006* Adjusted EBIT: Q4 – €209m (+5.6%; -3.2% qoq); 2015: €808m (+5.5%; +1.6% ahead of AV estimates) Cost optimisation has become an area of unwavered focus for UPM over the years, with the group achieving €41m and €150m of savings during Q4 and 2015, respectively, under the profit improvement programme. Although some of the gains were lost (€24m and €114m in Q4 and 2015) due to unfavourable currency hedges and higher Euro-denominated pulp prices (thereby increasing raw material costs), which primarily impacted the paper businesses. Even sequentially, barring some unexplained intersegment losses, performance across divisions remained robust – especially for the energy segment (+29%), which benefited from lower energy purchase costs. Attributable net profit: Q4 – €193m vs. €8m and €408m in Q4 14 and Q3 15, respectively; 2015: €916m (+79%; +6.8% ahead of AV estimates) Unlike Q4 14 – which was marred by €135m of paper asset impairments – Q4 15 was blemish-free. This was also in stark contrast with Stora Enso which has already announced €262m of impairments for Q4 15. In addition to the operating improvements and no hefty impairments, a one-time gain on forest assets (€265m in Q3 15) culminated into a staggering full-year net profit growth. Although further down in the statement of comprehensive income, €307m and €405m of losses were recognized in Q4 and 2015, respectively, on available-for-sale investments (primarily comprising the ill-fated TVO nuclear assets). *Balance sheet supported growth investments and dividends* Even though OCFs weakened a bit (-5.7%) to €1.2bn as last year’s working capital benefits reversed, a resilient balance sheet (net debt down 12% to record low levels of €2.4bn) helped UPM pursue its growth investments – with 2015 capex up 14% to €432m. Also, full-year dividend was increased by 7.1% to €0.75/share (+3.6% ahead of AV estimate). With most growth investments in place, management guides €350m capex for 2016.
In continuation with its Q2 performance, UPM-Kymmene maintained its business momentum in Q3 15. Sales were up 4.8% yoy (-0.7% qoq) to €2.5bn, driven by material benefits from a depreciating euro (down 19% vs. the USD) impacting the Biorefining (pulp) segment, followed by strong Raflatac (labelling), Plywood (+6.5%) and Energy (+9.6%) volumes. The top-line grew despite lower pulp volumes (-9.1%; due to scheduled maintenance shutdowns), and still weak paper and energy prices. Adjusted EBIT came in flat yoy at €217m as the group managed to reduce its variable costs by €52m (underpinned by a €150m cost savings programme – 73% achieved so far) and realised €19m of net forex benefits (as most gains were moderated by €29m losses on currency hedges in the paper businesses). Although, sequentially some fixed cost rationalisation (after paper capacity curtailments in H1 15) facilitated an 11% improvement in operating profits. Similar to Stora Enso, UPM too recognised (one-off) gains amounting to €289m on the revaluation of its forest assets. Consequently, net profit jumped 1.2x to €408m (+1.6x qoq). Reported OCFs continued to improve (+21% yoy; +12% qoq) to €363m as working capital improvements were sustained – release of €48m vs. use of €36m in Q3 14 and release of €31m in Q2 15). Management reiterated its 2015 profitability outlook being similar to the performance achieved in 2014. Although its optimism over an anticipated H2 recovery in the paper business will not materialise, adequate support should surface from the pulp business.
After a subtle start to 2015, UPM-Kymmene reported a good Q2 performance – broadly ahead of consensus estimates. Sales came in at €2.5bn (+4.4% yoy; +2.5% qoq) driven by higher euro-denominated prices in Biorefining (pulp) and Raflatac (labels), and solid label volumes. These benefits more than offset declining European paper demand (2.5% lower deliveries) and prices, and lower energy prices (-17%; due to a mild winter and improved hydrology in the Nordic region). Even though weakness in paper is continuing to date, strong development of other segments has helped UPM post its first quarterly top-line growth since Q2 12. Despite a slowing pace in cost savings (€27m vs. €47m and €46m in Q2 14 and Q1 15, respectively), adjusted EBIT inched higher (+17%; +3.7% qoq) to €195m. An average 24% depreciation of the euro vs. the US dollar in Q2 culminated in €60m of forex benefits, though €36m of hedging losses in the paper business dampened the gains. The bottom-line turnaround continued with a net profit of €160m (+24%; +3.2% qoq). Improving profitability and the reversion to normal working capital requirements (release of €31m vs. use of €36m and €147m in Q1 15 and Q2 14, respectively) translated into strong reported OCFs at €324m (+51%; +2x qoq). After a dismal H1 for European paper (Paper ENA) so far, management guides for some improvements in H2 earnings.
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