UPM (Buy, TP: EUR44.00) - Wood scarcity beneficiary
Wood scarcity beneficiary With 40% of our total SOTP of cEUR62/share attributable to ‘predictable’ low-cost pulp operations, UPM offers unique exposure to pulp, where we see favourable long-term demand prospects, in combination with high barriers to entry. With the ramp-up of the new pulp mill in Uruguay on track, we forecast a 100% EBITDA uplift for 2024. Besides an improved price outlook for pulp, we continue to see strong growth and value qualities. We reiterate our BUY and have increased our target price to EUR44 (42). What’s new? Due to improving market conditions and strong wood-fibre cost inflation in all regions, Chinese hardwood pulp prices – which tend to lead prices in other regions – have improved from depressed levels over the summer. Given market dynamics, we believe this trend will continue over the next few quarters. With UPM moving into a position of selling 3Mt market pulp on the back of its new Paso de los Toros mill in Uruguay with the lowest opex in the industry, we consider this highly positive. Substantial rise in cash flow. In addition to significant earnings growth from incremental pulp volumes at low cost, we expect a significant tailwind from improved label volumes. In sum, we expect 2024e EBITDA to increase by 100% YOY to cEUR3.1bn. As we forecast capex to decline from EUR950m in 2023 to EUR600m in 2024, this means the rise in cash flow looks set to be even more impressive. Green earnings growth. Beyond 2024, we believe the Leuna expansion (220kt/year bio-chemical plant in Germany should lead to an EBITDA uplift of EUR180m per year as well as help reduce global CO2 emissions (by 0.3–0.4 Mt per year). BUY reiterated and target price raised to EUR44. Based on our updated long-term estimates, UPM is trading at an FCF yield of c13% and a dividend yield of c6%, which we regard as unjustified given its competitive assets, not least within pulp. We also expect the balance sheet to become heavily overcapitalised, enabling growth investments in or outside traditional forestry businesses and/or buybacks.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.
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