Iberian Pulp : Great momentum but rich valuations
We retain our Neutral rating on Altri and Ence, but raise our FVs by 29% for Altri (to Eur 5.3) and by 46% for Ence (to Eur5.7) following the very strong run up in pulp prices to date in 2017. While the earnings momentum is very strong for Iberian pulp producers, we fear most of this is priced in. In our July note we expected the price to stabilize or even fall in 2H17, but reality was an acceleration of pulp prices supported by supply disruptions and strong demand. The temporary shutdown of CMPC’s mill in Brazil, capacity closures and integration into paper in China and a ban on imported recycled paper in China have all led to a 14% increase in pulp prices since the end of 1H17. This forces us to revise prices for 2018-2021E, as post 2018’s new capacity (restart of the CMPC mill and new Fibria mill which started in 4Q17), there are no new major projects that will add to the pulp supply in 2019-20E. As a mill would typically take at least 2 years to build and there isn’t a major new one under construction, we forecast a high price environment at least until 2020E. The increase in our estimates is very significant in 2018E and 2019E: Altri’s EBITDA rises 17% in 2018E and 47% in 2019E, while Ence’s goes up by 23% in 2018E and 53% in 2019E.Altri SGPS is a holding company based in Portugal. Co. is engaged in management of investments mainly in the industrial sector. Through its subsidiary companies, Co. is engaged in the production of pulp and paper through the Celbi, Celtejo and Caima Groups. Pulp is the core business of Co. and the focus is on bleached eucalyptus pulp. Co.'s three pulp mills, Celbi, Caima and Celtejo, produce over 550,000 tonnes per year. The paper mill, CPK, produces 60,000 tonnes of sack kraft paper per year. Co. manages over 78,000 ha of forest in Portugal certified by the Forest Stweardship Council.
Ence Energia Y Celulosa is engaged in the manufacture and commercialization of wood pulp and derivatives. Co. divides its activities into the following two business lines: Forest Division: Co. manages timberlands in South America and the Iberian Peninsula. Co. is involved in trading of wood, and supplies solid wood products including: plywood, sawn timber, parquet flooring and glued-edge paneling. Co. is involved in forest and environmental consulting. Pulp Division and Energy Production: Co. is engaged in the production of Eucalyptus globulus-based TCF and ECF paper pulp. Co. is also involved in the generation of electricity through biomass power producing plants.
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