UPM (Buy, TP: EUR43.00) - Some headwind; strong tailwinds
Although we foresee a headwind from lower prices for pulp and paper for Q3 and beyond, we expect this to be partly offset by higher prices for electricity and biodiesel. More importantly, within the next two quarters, Paso de Los Toro (2.1Mt) should boost UPM’s pulp capacity by close to 60%, while its net position in electricity should rise from 2TWh to 7TWh a year, mainly due to the new nuclear power plant OL 3. We have raised our target price to EUR43 (42) and reiterate our BUY. Target price lifted to EUR43 (42). In our view, UPM has one of the best track records and growth profiles in the industry, which is not reflected in its valuation. Due to its three projects, Paso de Los Toro Pulp (pulp), OL 3 (power) and Leuna (biochemicals), we estimate an annual EBIT increase of close to EUR900m over 2023–2024e, taking the EV/EBIT from c12x in 2022e to c8x in 2024e. We also see a solid balance sheet, a well-invested asset portfolio, and an attractive and growing dividend yield (5% for 2024e). Compelling earnings growth. We have slightly lowered our forecasts for publication paper, but this is more than offset by slightly increased estimates for the Biorefining and Energy businesses. In sum, we have made relatively small but positive estimate changes for the group. We forecast 2022 EBITDA of EUR2.1bn, and EUR2.6bn in 2023, well above Bloomberg consensus of EUR1.9bn and EUR2bn, respectively. 50% potential upside to our SOTP of EUR51/share. We see ample potential value in the asset portfolio from becoming increasingly ‘green’. Our SOTP indicates a value of EUR51/share. Given the energy crisis in Europe, we consider the electricity price risk to be very much skewed to the upside. Based on a long-term electricity price of cEUR70/MWh, we value the energy business at EUR13/share. BUY reiterated, target price raised to EUR43. Since UPM is significant long own electricity and has good availability of relatively cheap fibres (35% backward integration), we believe total opex for 2022–2023e seems under control. Also, pricing power should remain very favourable for the growing labels business (Raflatac).UPM-Kymmene is a global paper and forest products group, mainly engaged in the production of paper, with an emphasis on the manufacture and sale of printing and writing papers. Co.'s operations comprise of these segments: UPM Biorefining, UPM Energy, UPM Raflatac, UPM Paper Asia, UPM Paper ENA, UPM Plywood and Other. UPM Biocomposites, UPM Biochemicals business units and Group services are reported in Other operations. Co.'s activities are centred in European Union countries, North and South America and Asia with production plants in 13 countries.
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.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.