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Packaging and power extension strategy

Arctic Paper 8 November 2021 QuickView
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Arctic Paper

Packaging and power extension strategy

Paper & packaging

Deutsches Eigenkapitalforum 2021

8 November 2021

Price

PLN9.09

Market cap

PLN630m

Share price graph

Share details

Code

ATC

Shares in issue

69.3m

Net debt at 30 June 2021

PLN152.6m

Business description

Arctic Paper is a Poland-based paper producer (fifth largest producer of graphical paper in Europe) with paper mills located in Poland and Sweden (with capacity of c 685,000 metric tonnes of paper per year). Its majority ownership of Rottneros (51%) complements the company’s portfolio with pulp, partly produced for its own paper products. Arctic Paper is listed on the stock exchanges in Warsaw (WSE) and Stockholm (Nasdaq).

Bull

Pulp and paper mix provides effective business hedge and ensures stable results.

Packaging business benefits from the shift from plastic towards sustainable solutions.

Booming e-commerce market is boosting demand for packaging.

Bear

Company’s competitors are integrated paper producers operating on a larger scale.

Possible unfavourable pricing movements (pulp, paper).

Analyst

Marta Szudzichowska

+44 (0)20 3077 57 00

Arctic Paper, one of the leading producers of high-quality graphical paper in Europe, recently unveiled its new 4P strategy for 2022 to 2030. The strategy will reposition Arctic into four key pillars, building on its paper and pulp core businesses to invest and develop in packaging and power. This should enable Arctic to enhance its focus on sustainable solutions (eg reducing plastic waste), and to build its renewable energy business. The strategic investments will move the company up the value chain by adding higher margined packaging and power assets, while retaining its pulp and paper operations. The 4P strategy includes targets for EBITDA to be c 70% higher by 2030 and for Arctic to be carbon neutral by 2035.

Diversification towards higher-margin products

Arctic’s current business comprises mainly paper and pulp (67% and 30% of FY20 revenues, respectively). By 2030 the company plans to generate c 18% of revenues from packaging and c 7% from power production, with overall revenues 25% higher versus FY21. The addition of higher-margined packaging and power should boost the EBITDA margin to 15% from the current 10%. Arctic Paper plans to spend c 40% capex to support expansion of the new business areas, adding 100kt of packaging paper capacity and 100MW of renewable power capacity by 2030.

Current business mix supports stable results

Paper margins are driven by paper pricing trends and raw material costs, mainly pulp (51% of COGS in H121). A favourable pulp and paper mix provides an inherent hedge between the two, generating stable EBITDA results (2014–20 EBITDA range of €51–65m). Additionally, the company is largely shielded from high electricity prices (68% YTD increase in the wholesale price in Poland), due to its hedging policy and on-site generation of two-thirds of its energy needs (50% from renewable sources). Arctic Paper paid a 7c dividend in 2021 (after a three-year break due to debt covenants), at a 19% pay-out ratio (the current dividend policy targets 20–25%). Low leverage, with net debt to EBITDA of 0.6x at end-June 2021 (vs a peer average of 1.8x), allows for financing part of strategic investments with new debt.

Valuation

Based on its consensus (one contributor) FY22e P/E (7.5x) and EV/EBITDA (3.7x), Arctic Paper trades at discounts of 42% and 51% to European paper and packaging peers. This may reflect the current business structure (mainly pulp and paper), whereas peers are operating higher-margin packaging businesses. That may indicate the potential valuation increase of a successful strategy realisation.

Year
end

Revenue
(PLNm)

EBITDA
(PLNm)

EPS
(PLN)

DPS
(PLN)

P/E
(x)

Dividend yield (%)

12/19

3,117

278

1.19

0.0

7.6

N/A

12/20

2,848

271

1.60

0.0

5.7

N/A

12/21e*

3,092

277

1.41

0.3

6.4

3.3

12/22e*

3,208

276

1.22

0.4

7.5

4.6

Source: Arctic Paper, Refinitiv. Note: *Consensus data based on one contributor.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been prepared and issued by Edison. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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