EUR 850.00 For Business Accounts Only

Morningstar | Stora Enso’s 3Q Profits Rise on Continued High Prices; Shares Overvalued

No-moat Stora Enso reported third-quarter EBIT of EUR 358 million, up 23% over the prior-year period and ahead of our expectations. Positive results were largely driven by higher pricing, which we see as unsustainable. Volumes declined 3% over 2017. We don’t expect to make a material change to our EUR 9.50 fair value estimate. At current levels, the shares look overvalued.

Segment performance was volatile, as per usual. Third-quarter EBIT in packaging solutions, biomaterials, wood products, and paper all rose between 42% and 125%, while consumer board was down 41%. Stora Enso remains confident in its near-term outlook, expecting fourth-quarter EBIT to be in line with or slightly lower than the third quarter, which would be another double-digit percentage increase on a year-over-year basis.

Containerboard producers like Stora Enso are currently enjoying the best of both worlds, with higher prices and lower input costs. Indeed, third-quarter EBIT in the packaging solutions increased 42% over the prior-year period. Demand is being driven by increasing online retail sales. European online retail sales increased 14.2% in 2017, according to the Centre for Retail Research. We see this as a structural shift supportive of long-term demand for containerboard. On the cost side, prices have fallen for a key input, old corrugated cardboard, owing to the ban of waste-paper imports to China that was announced in mid-2017, which has led to a glut of the same outside China. We think this will be more of a temporary situation, as final import rules could still be modified and supply chains have not had a chance to adjust, but considerable uncertainty remains. Overall, our view on the segment is more positive.

Pulp prices have risen sharply as well, another consequence of the ban on waste paper in China, but also due to production issues on the supply side. In 2017, a major Brazilian plant was off line due to a malfunction, and in Indonesia, tougher environmental regulations on logging have made it more difficult to secure raw wood. The combination of these factors will likely cause favourable pulp market conditions to continue in fourth-quarter 2018; this was seen in third-quarter EBIT for the biomaterials segment, which increased 42% over 2017. However, we would expect the plant issue in Brazil to be resolved quickly, and large capacity increases are due to come on line in 2018-19.