UPM (Buy, TP: EUR46.00) - Rosy earnings and DPS outlook
Despite cutting our 2023–2024e EBITDA by 7–4%, we remain well above consensus. UPM is in great shape in our view, and relatively immune to cost inflation, and we continue to believe it will reap significant benefits from selling excess electricity and more pulp volumes from its new mill in Uruguay. We are increasingly confident it will raise its proposed DPS for 2022 given the reduced operational risk for its transformational projects and its overcapitalised balance sheet. We have edged up our target price to EUR46 (45) and reiterate our BUY. A unique self-help earnings growth story. Despite cutting our 2023e EBITDA by 7% to EUR3.1bn and 2024e by 4% to EUR3.4bn (primarily due to slightly more conservative pulp price assumptions), we remain well above Bloomberg consensus of EUR2.6bn and EUR2.7bn, respectively. For Q4, we forecast EBITDA of EUR836m, and expect management to reiterate with the results that the vital Paso de Los Toro Pulp mill is proceeding towards the final phase for first production, and that the OL3 nuclear power reactor should move to full production in March (4TWh power net to UPM). In addition, we expect UPM to propose a DPS of EUR1.6 for 2022, up sharply from the EUR1.3 paid over 2018–2021 (the results are due at 08:30–09:00 CET on 2 February). ~80% potential upside to our new SOTP. Mainly due to a new DCF-based valuation approach for UPM’s Pulp division, we have raised our SOTP to EUR63/share (from EUR54), of which the Pulp division accounts for EUR28/share. Based on a long-term electricity price of cEUR70/MWh, we value the Energy business at EUR13/share. Our top pick in forestry space; BUY reiterated and target price raised to EUR46. In our view, UPM has the best track record and growth profile in the industry, which are not reflected in its valuation. We also highlight that UPM has good availability of relatively low-cost wood fibre. Thus, we believe overall opex seems under control, and overall pricing power should remain very healthy, with UPM’s vital label business mainly exposed to resilient consumer end-markets.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.
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