Morningstar | UPM Reports In-line Results in 2Q; Shares Fairly Valued
No-moat UPM-Kymmene reported second-quarter EBIT of EUR 345 million, a 3% increase over the prior-year period, and in line with consensus. Further, the company maintained 2019 guidance for performance to continue at a good level. This is in stark contrast with major competitor, Stora Enso, which reported a 12% decline in second- quarter EBIT and abandoned its 2019 guidance because of the uncertain economic environment. The key difference between the two companies is UPM’s energy division, which more than doubled EBIT in the second quarter because of materially higher electricity prices. Excluding energy, second-quarter EBIT for the company would have fallen 5%. We continue to expect softer results in second-half 2019 for UPM, particularly in biorefining and communication papers, and therefore don’t expect to make a significant change to our EUR 20 fair value estimate. At current levels, the shares look fairly valued.Biorefining held up in the second quarter with EBIT increasing 4% over 2018 because of higher volumes and less maintenance downtime. However, global pulp demand has clearly slowed in the first half of the year. We continue to expect deteriorating performance in biorefining in the second half of 2019 because of soft demand from China. EBIT in communication papers fell 10% in the second quarter over 2019. As we discussed in our first-quarter note, we didn’t expect the sharp increase in the segment's first-quarter EBIT to be sustainable. The decline in paper demand has accelerated this year, with demand for graphic papers in Europe falling 9% in the first half and demand for magazine papers in North America falling 13%. Consequently, we expect segment performance to deteriorate further in second-half 2019.
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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