Morningstar | UPM Updated Forecasts and Estimates from 10 Apr 2019
No-moat UPM reported fourth-quarter EBIT of EUR 404 million, a 10% increase over the prior-year period. This was in line with consensus but ahead of our expectations. High pulp prices were the major driver of better-than-expected performance versus our numbers. We don’t expect to make a significant change to our EUR 20 fair value estimate. At current levels, the shares look overvalued.Softness is creeping into UPM’s business, in our opinion. Fourth-quarter EBIT collapsed in specialty papers to almost zero. This segment primarily represents UPM’s paper business in Asia. Furthermore, Raflatac seems to be treading water and plywood was down sharply, although we concede there were some exceptional issues in plywood due to strikes in Finland. Communication papers has held up well recently, but the demand decline appears to be accelerating, down 6%-7% in Europe in 2018. These headwinds were offset by sensational performance in the biorefining business, again due to continued high pulp prices. Fourth-quarter EBIT in biorefining increased 50% over the prior-year period. In 2019, UPM expects business performance to "continue at a good level." We expect EBIT to decline, however, due mainly to lower pulp prices.
We think UPM's margins hit a cyclical peak in 2018. A slowdown in Europe and China will weigh on results in the near term, causing EBIT to fall in 2019. China is the biggest driver of global pulp demand growth, and softer economic growth in that country will have global implications for the pulp market. We expect prices to fall significantly from their current lofty position.
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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