Morningstar | Dark Clouds Continue to Form Over Stora Enso in 2Q; Shares Fairly Valued
No-moat Stora Enso reported second-quarter EBIT of EUR 287 million, down 12% over 2018 and below consensus. Declining profits look set to accelerate as third-quarter guidance is particularly gloomy. Third-quarter EBIT is expected to be in the range of EUR 200 million-EUR 280 million, indicating a 12%-37% decline over 2018 with the wide range revealing the uncertainty in the current environment. Further, the company has abandoned its 2019 guidance for higher sales over 2018, which the company blames on trade wars and a possible hard Brexit. We have been bearish on Stora for some time, evidenced by our 1-star or 2-star rating on the stock throughout most of 2017–2018. However, the stock is now sitting just above our EUR 9.50 fair value estimate, which we don’t expect to change on the back of second-quarter results.With the outlook deteriorating, Stora announced it was increasing its cost-savings program to EUR 200 million from EUR 120 million. At the end of the second quarter, EUR 60 million of the cost savings were achieved. Packaging solutions led the charge downward in the second quarter, with EBIT falling 32% because of lower recycled paper-based containerboard and kraftliner prices. We expect performance to deteriorate further as prices rise for old corrugated cardboard, a key cost input. Biomaterials was also down, with EBIT falling 6% because of falling pulp prices. We expect this trend to continue with softer demand from China. Consumer board was the bright spot, with EBIT up 11% owing to the successful implementation of price increases. This is positive because we did not expect any price improvement in 2019 given the long-term fixed-price nature of contracts in this division.
Stora Enso is a provider of renewable solutions in packaging, biomaterials, wooden constructions and paper on global markets. Co.'s reporting segments are: Consumer Board, which develops and provides consumer packaging boards for printing and packaging applications; Packaging Solutions, which develops fibre-based packaging; Biomaterials, which provides a variety of pulp grades for paper, board, tissue, textile and hygiene product producers; Wood Products, which provides wood-based solutions for building and housing; Paper, which provides paper solutions for print media and office use; as well as Other, which includes Co.'s shareholding in the energy company, Pohjolan Voima.
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