Morningstar | UPM Reports In-Line Results in 1Q; Shares Overvalued
No-moat UPM reported first-quarter EBIT of EUR 374 million, a 5% increase over the prior-year period. This was broadly in line with our expectations, except for communication papers, where EBIT increased nearly 60% because of significantly higher prices. We don't expect this rebound to continue for long. The decline in demand for paper accelerated in the first quarter. In Europe, the demand for graphic papers decreased 7% compared with 2018, while in North America, demand for magazine papers fell 10%. We don’t expect to make a significant change to our EUR 20 fair value estimate. At current levels, the shares look overvalued.Biorefining remained strong, with a 9% increase in EBIT in the quarter as volumes and prices increased over the prior-year period. We continue to expect deteriorating performance in biorefining during 2019 because of soft demand in China. In support of our view, pulp prices appear to be rolling over in the first quarter. The malaise in China has already hit UPM’s specialty paper segment, where EBIT fell almost 80% with the margin now a paltry 2.4%. Raflatac and UPM energy were mainly treading water during the quarter. Raflatac's volumes and prices improved, but this was mostly offset by higher costs. UPM energy benefited from higher electricity prices, but hydropower generation was limited because of the continuing dry conditions.
UPM-Kymmene is a global paper and forest products group, mainly engaged in the production of paper, with an emphasis on the manufacture and sale of printing and writing papers. Co.'s operations comprise of these segments: UPM Biorefining, UPM Energy, UPM Raflatac, UPM Paper Asia, UPM Paper ENA, UPM Plywood and Other. UPM Biocomposites, UPM Biochemicals business units and Group services are reported in Other operations. Co.'s activities are centred in European Union countries, North and South America and Asia with production plants in 13 countries.
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