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...
