Rottneros: Current sweet spot to fade into 2023 - ABG

Q2: all-time high EBIT of SEK 219m Pulp prices in Europe at ATH, more supply into '23 Fair value range of SEK 10-15/share Q2: all-time high EBIT of SEK 219m

Q2 EBIT of SEK 219m was strong and above our estimate of SEK 159m. EBIT increased 51% q-o-q, and the deviation from our estimate was driven by higher realised prices and more volumes sold. The EBIT margin increased to ~28% in Q2 vs. ~22% in Q1. The result significantly improved y-o-y due to the sharply higher prices for pulp and FX tailwinds. Q2’21 EBIT was SEK 97m. The positive effects y-o-y were SEK 156m from higher pulp prices/currency, SEK 51m from higher volumes. The negative effects were higher variable costs (SEK -76m), fixed costs (SEK -4m) and other (-5m). For Q3, we expect higher wood costs, maintenance and lower volumes to lower earnings (i.e., Q2 could be the peak earnings of the cycle). However, we raise our ’22 estimates because of the strong report, slightly higher short-term pulp prices and a delayed impact from higher pulpwood costs (~2 Qs lag).

Pulp prices at ATH, but more supply into ‘23e Pulp prices in Europe have risen above their 2021 peak, to USD 1,480/t. Chinese pulp prices have risen ~45% since November. The pulp market appears tight short-term (supply disruptions) and prices rose 3% in June m-o-m. Note that our leading indicator for OECD IP growth is pointing down and pulp prices usually follow IP growth with a lag. Supply growth has been reduced to 2% in ’22e (delayed projects), but supply growth could become problematic at +5% in ’23e. Market pulp shipments have grown by 2-3% p.a., aided by megatrends driving demand for packaging and tissue.

Valuation – fair value range of SEK 10-15/share Rottneros is trading at an EV/CE of 1.1x vs. 0.8x historically, but we note its earnings are higher vs. history. ATRoCE averaged ~11.9% from ’16-’22e, and we estimate 10.2% for ’23e-’24e. By using a WACC of 9% and the Q2’22 CE of SEK 1.97bn, we find a fair value of SEK 15-16/sh. The midcycle valuation points ... Läs mer på ABG Sundal Collier

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