EUR 850.00 For Business Accounts Only

Morningstar | Stora Enso's 3Q Profits Rise on Continued High Prices

Known as one of Europe’s largest paper companies, Stora Enso Oyj has ambitions to become a leader in forestry-based renewable materials. The company has made good progress toward this goal, although not totally of its own volition, as increasing digitisation has crushed demand for European graphic paper (negative 4.5% CAGR since 2007). Over the past decade, the paper segment’s contribution to Stora’s total sales has been cut by more than half to 24%. We see no end to the structural decline in the European paper market on the horizon, and this will remain a drag on Stora Enso’s profitability for the foreseeable future. Stora Enso is banking on growth in its consumer board and biomaterials segments to drive the company forward while the paper business is managed for cash generation. The company is a major global player in consumer board (26% of group EBIT). Indeed, Stora provides the packaging board for a third of the world’s beverage cartons. We expect this business to benefit both from a wealthier, expanding population in emerging markets and from substitution of packaging made from nonrenewable materials. The consumer board segment is facing near-term headwinds due to rising input costs and long-term fixed price contracts with its customers, but our expecations for lower pulp prices should provide some relief. The biomaterials segment (28% of group EBIT) primarily represents the company’s external pulp sales, which are typically purchased by producers of tissue paper, hygiene products, and various forms of packaging. Demand from China, particularly in tissue, will continue to support industry growth in the long term. However, a slowdown in Europe and China should dampen pulp demand in the near term, causing the current high prices and margins to fade. Stora remains heavily European-centric in terms of revenue, with 75% of its total revenue coming from the region. China is the only other meaningful region, contributing 9% of revenue. Consequently, while growth projects have been largely focused on serving demand in emerging markets, the company’s fortunes remain largely tied to the health of the European economy.