UPM (Buy, TP: EUR48.00) - The power of growth and buybacks
UPM’s Q4 earnings and outlook were largely in line with our optimistic expectations and showed it has pricing power and good control of its input costs. Over the next few weeks, UPM plans to start-up its new 2.1Mt pulp operations, which we believe will give a near-30% step up from the 2022 EBITDA base when fully up and running. Reflecting higher estimates and the company’s new dividend policy and potential buybacks, we reiterate our BUY and have raised our target price to EUR48 (46). Mixed but overall solid Q4. Although the important labels business was slightly weaker than we expected sue to low volumes, it was offset by record-strong profits at the paper business and strong earnings at the bio-diesel plant. On a group level, we find it interesting that prices were up c7–8% in Q4 QOQ while variable costs were almost unchanged. Impressive organic growth. In line with our positive thinking, management confirmed that Paso de Los Toro (2.1Mt pulp mill) would start production in a few weeks, which we believe will give a near-30% step up from the 2022 EBITDA base when fully up and running at end-2023e. Management expects the new mill to have a positive impact on EBITDA in Q2 and indicates quite a quick ramp-up phase. New dividend policy = more dividends. UPM proposed a DPS of EUR1.5 for 2022 and interestingly introduced a new dividend policy with a payout ratio of at least 50% of EPS going forward. This has prompted us to raise our DPS forecasts to EUR2 for 2023e and EUR2.4 for 2024e. On top of dividends, UPM said it would consider buybacks used relative investment opportunities and company valuation. Unique (green) earnings growth story. Reflecting higher price assumptions for paper and pulp, we have raised our 2023–2024e EBITDA by 3–10%. We note the appealing growth profile for 2022–2025e earnings, where Paso de Los Toro and the new OL3 power plant are instrumental. We still believe UPM is in a league of its own and this is not reflected in the share price. Our SOTP is EUR62 (pulp cEUR28, energy cEUR13).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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