Morningstar | Stora's 1Q Not as Bad as Expected, but Leading Indicators Are Ominous
No-moat Stora Enso reported first-quarter EBIT of EUR 324 million, down 12% from 2018. This was better than consensus and our expectations. Nevertheless, we continue to have a bearish view on the company, particularly in its biomaterials and packaging solutions segments. Industry pulp inventories have risen sharply, and pulp and containerboard prices are now rolling over, which supports our view. Consequently, we don’t expect to change our below-consensus forecast or EUR 9.50 fair value estimate. At current levels, the shares look moderately overvalued.Momentum has clearly shifted downward at Stora Enso. After two years of double- or triple-digit EBIT growth in packaging solutions, EBIT fell 16% in the first quarter on the back of cost inflation and lower margins in China packaging. We expect performance to deteriorate further as prices rise for old corrugated cardboard, a key cost input. Consumer board continues to struggle with lower-priced legacy contracts, resulting in a 40% decline in first-quarter EBIT from 2018. We expect some improvement here over the next 12-18 months as contracts come up for renewal and pulp prices fall. EBIT growth was largely flat in biomaterials, wood products, and paper. Similar to packaging solutions, biomaterials was a key driver of positive results over the last two years. With softer demand from China, we expect this to change during 2019.
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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