EUR 850.00 For Business Accounts Only

Morningstar | UPM 2Q in line with our expectations but second-half outlook stronger; shares overvalued.

UPM-Kymmene Oyj is Europe’s biggest graphic paper producer, with 20% market share. The European paper market has been in decline since 2007 as a result of increasing digitisation, with demand falling at a CAGR of 4.5%. As a result, UPM is diversifying its business. Over the past decade, UPM has kept sales flat, but the contribution from paper has declined from 80% to less than 50% of the total. UPM’s paper business is now segmented into Paper ENA (the company's Europe/North America segment) and Specialty Papers (formerly Paper Asia). While Paper ENA generates 45% of total sales, its contribution to EBIT is modest. The prospects for Specialty Papers are more optimistic, as the market is still growing. The segment generates 13% of company revenue, although half of that is from UPM’s global label and packaging materials business.The biorefining segment is now the largest contributor to company profits, generating 45% of EBIT. This segment largely represents the company’s chemical pulp business. This pulp was previously used only to feed internal paper mills, but the segment now sells half of its volumes externally to producers of tissue paper, hygiene products, and packaging. Demand from China, particularly in tissue, will continue to support industry growth. However, new industry capacity scheduled to come on line in the medium term should cause the segment’s current high margins to fade. As paper production is an energy-intensive business, UPM has acquired a sizeable portfolio of power-generating assets over the years. The highly profitable energy segment contributes 7% of EBIT from wholesale electricity sales in the Nordic region. UPM Raflatac is the company’s self-adhesive labelling business, which accounts for about 11% of EBIT. Raflatac is the second-largest global producer of these materials, behind Avery Dennison, and is a relatively stable contributor to UPM’s financial performance. UPM remains predominantly Europe-focused, with 60% of sales generated from the continent. However, this has fallen by about 15% in the past decade, owing to a combination of the declining European graphic paper market and the company’s investments in China and Latin America.