Beaten to a Pulp - Upgrade Stora Enso to Buy

29 March 2020

Jeffires lowered SCA, UPM & STERV 2020 EBIT c12-30% to reflect the negative macro impact from COVID-19 and now see a more subdued 2H20-21 pulp price recovery and material graphic paper demand declines in 2020. With Stora trading on a c22% discount to NAV and downside support from forest holdings, we see risk/reward skewed to the upside - Upgrade to Buy.

Insights

Pulp - Subdued Recovery: Post our 13 Mar pulp expert call, we see a subdued 2020 price recovery in 3Q/4Q, with the potential negative demand impact from COVID-19 dashing any hope of a V-shaped 2020 recovery. With current prices below the cash costs of high cost producers, unscheduled pulp mill downtime globally & no major new pulp supply coming on stream until 2H21, we see limited further price downside from here. Overall we now model flat pulp prices through 1H & more subdued price increases in 2H20-21E. Our 2020 avg pulp prices decline c7% vs previous and 2021/22 avg prices decline c3%. See p5-6

Graphic Paper - "Batten Down the Hacthes": With EU countries restricting non-essential travel, encouraging working from home and/or enforcing isolation due to COVID-19 we expect a material demand decline for graphic paper in 2020E (2019: -8%). We now estimate the demand decline impact could be c15% similar to that seen in 2009, well above -5% pa 2008-2019 avg decline trend. With mid single digit (MSD) paper price declines in 1Q20, we expect further price declines to high single digits (HSD) in 2020E, with overcapacity across all graphic paper grades forcing industry capacity closures. See p6-7

Stora Enso - Risk/reward Upside (Upgrade to Buy, €10): STERV is trading on a 22% discount to its €9.42 NAV and with downside support from its forest holdings we see risk/reward skewed to the upside. With lower earnings' already reflected in the share price, sustainability tailwinds medium term and gearing to any pulp price recovery from 2H20 we upgrade to Buy. Our base case SOTP declines to €10 (from €12.40) reflecting c30% 2020 EBIT downgrades to €600m (>50% below FY18: €1,325m peak). STERV has no financial debt covenants, a manageable debt profile, a healthy liquidly position (€600m undrawn RCF and €876m cash at FY19). We expect a flat DPS over 2020-22E (>6% div yield) and for net debt to EBITDA to decline towards 2x by 2022E (FY20E: 2.8x) as profits recover off 2020 lows. See p8-12

SCA Forest Value Support (Hold, SEK95): SCA share price is underpinned by forest value, accounting for SEK70 per share (post a c25% liquidity discount) or >70% of SCA's EV. Thus the earnings' downside from weaker macro environment in the industrial divisions has a smaller relative impact on the share price vs STERV & UPM. Remain Hold. See p13-14

UPM - ST Caution vs LT Transformational Upside (Hold, €24): We see appeal in UPM's c6% div yield supported by its FY19 net cash balance sheet and >€2bn liquidity. Off trough 2020 earnings we model >70% 2025 EBIT upside (c11% pa 2020-25 CAGR) driven by >€4bn self funded transformational investments (here) and underlying EBIT recovery. While we see clear long term upside, on a shorter term horizon our caution around the graphic paper markets in 2020 keep us at Hold with €25 PT (from €30). See p15-16



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