Stora Enso (Buy, TP: EUR21.00) - Successful transformation on track
Stora Enso reported another strong set of results, adding to its track record. Owing to company-specific reasons (including exposure to resilient consumer end-markets and a very competitive cost position), the earnings outlook should remain solid for 2023e onwards. We have made only small underlying forecast changes, now suggesting P/Es below 10x. We reiterate our BUY and EUR21 target price. Q3 solid across the board. The Q3 report showed very strong pricing power across the board not least for the pulp business, and Q3 operational EBIT of EUR527m was more than 10% above consensus and the strongest earnings quarter over the past two decades. Value-accretive transformational story. Q3 was very important for the company and the transformation strategy. Two major paper mills were divested, a major corrugated company in Belgium was acquired for cEUR1bn and the board finally sanctioned a conversion investment into packaging in Finland of EUR1bn. In good shape. As we expected, Stora Enso acknowledged early signs of softness in the pulp market and that wood product markets were hard-hit by increased uncertainty for builders and declining confidence for the overall construction market. However, it also said it saw stable demand for its key niches in consumer board at the same time as opex was under good control due to the backward business model with own forests (30% integration) and nearly 100% self-sufficiency in electricity for 2023e onwards due to its minority stake in OL 3 (new nuclear power plant in Finland). BUY and EUR21 target price reiterated. Reflecting the paper mill divestments, we have cut our 2023e EBIT by c6% but our underlying forecasts are largely unchanged. With the stock trading at 2023–2024e P/Es below 10x, we find the valuation very appealing. Furthermore, with favourable demand prospects underpinned by structural factors (desire to move away from plastics and concrete), and substantial upside potential from ongoing investments and good long-term fundamentals for the pulp business, we see a promising longer-term earnings outlook – particularly considering the high barriers to entry in all the company’s businesses.Stora Enso is a provider of renewable solutions in packaging, biomaterials, wooden constructions and paper on global markets. Co.'s reporting segments are: Consumer Board, which develops and provides consumer packaging boards for printing and packaging applications; Packaging Solutions, which develops fibre-based packaging; Biomaterials, which provides a variety of pulp grades for paper, board, tissue, textile and hygiene product producers; Wood Products, which provides wood-based solutions for building and housing; Paper, which provides paper solutions for print media and office use; as well as Other, which includes Co.'s shareholding in the energy company, Pohjolan Voima.
DNB Markets is the investment banking arm of DNB Bank ASA and is focused primarily on the Nordic region, as well as internationally on niches such as global shipping, energy and related services, and seafood. DNB Markets offers services in FICC, Equities and Investment Banking advisory from offices in Oslo, Stockholm, London, Singapore and New York. Equity research coverage is offered on c250 Nordic companies. DNB was ranked no.2 in Extel Nordic Research 2017. The DNB Markets’ Credit and FICC Macro & FX Research teams are repeatedly highly rated by Prospera Nordic Institutional Investor Surveys.
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