Research: Industrials
Arctic Paper continues to grapple with the ongoing market challenges that have affected 2023 thus far, with lower demand, heightened input costs and price volatility across most of its segments. Despite this, the company has maintained a robust balance sheet with record Q323 net cash of PLN307m, enabling its continued investment and growth within sustainable energy solutions, a new revenue stream. Q323 margins were broadly protected through the implementation of cost containment measures and adjusting capacity to match demand, while early signs of recovery from cyclical lows in both paper and pulp prices began to appear.
Arctic Paper |
Advancing into new revenue streams
Industrials |
Spotlight – Update
7 November 2023 |
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Arctic Paper is a research client of Edison Investment Research Limited |
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Arctic Paper continues to grapple with the ongoing market challenges that have affected 2023 thus far, with lower demand, heightened input costs and price volatility across most of its segments. Despite this, the company has maintained a robust balance sheet with record Q323 net cash of PLN307m, enabling its continued investment and growth within sustainable energy solutions, a new revenue stream. Q323 margins were broadly protected through the implementation of cost containment measures and adjusting capacity to match demand, while early signs of recovery from cyclical lows in both paper and pulp prices began to appear.
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Consensus estimates
Source: Company reports, Refinitiv |
Early signs of cyclical recovery
Despite dampened demand in Q323, effective cost control measures led to somewhat shielded margins with an EBITDA margin of 14.6%, which we note is substantially higher than the long-run historical average of 10%. Arctic maintained a robust balance sheet with record period-end net cash of PLN307m. Group revenue fell to PLN855m compared to a record Q322 (PLN1,402m), albeit this represents a 2% increase on Q223. Paper revenue and EBITDA decreased by 43% and 54% to PLN206m and PLN95m, respectively, compared to Q322. However, capacity utilisation increased to 66% from 55% in the previous quarter, reflecting early signs of recovery in paper demand and prices from cyclical lows. Pulp volumes were affected by customer destocking and declining prices.
Continuing with extensive capex programme
Arctic’s strong balance sheet enables it to continue its diversification into the higher-margin energy and packaging markets and capture the higher end of the value chain. The company is progressing with its capex programme, investing in various sustainable projects, which include upgrading the Grycksbo biofuel boiler and steam turbine, expanding CTMP pulp capacity, building a tall oil plant and securing patent rights for its biodegradable packaging paper manufacturing technology. In line with its 4P strategy, this should enable the business to become less commoditised, reducing earnings volatility and improving margins.
Valuation: Large discount to peers
Based on consensus FY24e P/E of 8.5x and EV/EBITDA of 3.8x, Arctic Paper trades at discounts of 35% and 51%, respectively, to its European paper and packaging peers.
Q323: Focused on margin management
The first nine months of FY23 marked a period faced with numerous obstacles for the European paper and pulp industry, involving an economic downturn, which resulted in lower demand for graphic paper and pulp, in addition to decreasing customer inventories. Despite this period of cyclical weakness, management successfully focused on margins, which were broadly protected through the implementation of cost containment measures and adjusting capacity to match demand. In addition, Q323 experienced improved profitability and margins compared to the previous quarter, reflecting early signs of improvement in paper and pulp prices from cyclical lows.
Exhibit 1: Arctic Paper Q323 income statement summary
PLNm |
Q323 |
Q322 |
% change |
Q223 |
% change |
Q1–Q323 |
Q1–Q322 |
% change |
Group sales |
854.8 |
1,402.1 |
-39.0% |
836.2 |
2.2% |
2,723.30 |
3,809.2 |
-28.5% |
Gross profit |
193.2 |
414.7 |
-53.4% |
141.6 |
36.4% |
604.2 |
1,170.4 |
-48.4% |
Gross margin |
22.6% |
29.6% |
- |
16.9% |
- |
22.2% |
30.7% |
- |
Group EBITDA |
124.5 |
298.2 |
-58.2% |
68.9 |
80.7% |
379.0 |
834.00 |
-54.6% |
Group EBITDA margin |
14.6% |
21.3% |
- |
8.2% |
- |
13.9% |
21.9% |
- |
EBIT |
95.0 |
259.6 |
-63.4% |
39.3 |
141.7% |
290.0 |
733.7 |
-60.5% |
EBIT margin |
11.1% |
18.5% |
- |
4.7% |
- |
10.6% |
19.3% |
- |
Profit before tax |
83.9 |
342.3 |
-75.5% |
51.3 |
- |
289.7 |
816.1 |
-64.5% |
Net income |
58.2 |
281.5 |
-79.3% |
46.9 |
24.1% |
236.8 |
682.00 |
-65.3% |
EPS (PLN) |
0.74 |
3.20 |
-76.9% |
0.57 |
29.8% |
2.87 |
8.06 |
-64.4% |
Source: Arctic Paper reports
Q323 results appear subdued when compared to last year’s record quarter as group revenues and EBITDA declined by 39% and 58% to PLN854.8m and PLN124.5m, respectively, compared to Q322. However, through effective cost containment measures and mill capacity adjustments, the EBITDA margin stood at a healthy 15%, a substantial improvement when compared to the long-run five-year historical EBITDA margin average of 10%. Net income declined by 79% to PLN58.2m reflecting this year’s exceptional business environment, with an extreme downcycle occurring in the industry. Q323, however, showed considerable improvements when compared to Q223 in terms of profitability and margins, as the paper and pulp markets start to show gradual signs of recovery.
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Exhibit 2: Quarterly revenue, EBITDA and EBITDA margins, Q121–Q323 |
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Source: Arctic Paper reports. Note: Long-run five-year historical EBITDA margin average of 10% |
Sector starting to show signs of recovery
Arctic is beginning to see signs of recovery from bottom-of-the-cycle pulp prices, weaker timber markets and high wood costs in Europe. Both paper and pulp prices appear to be stabilising, with pulp prices even starting to increase. Signs of destocking phasing out in the value chain are emerging and it appears as though the pendulum is somewhat swinging back to the sellers’ advantage, which should benefit Arctic going forward. However, there is a need for caution as uncertainty remains, especially as pulp and paper prices are closely linked to general GDP development.
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Research: Real Estate
Target Healthcare REIT’s mid-year rebasing of DPS sought to establish a base for growth on a fully covered basis. With FY23 results in line with previous indications, and progress continuing, the company has increased the quarterly rate of DPS by 2% from Q124. With rent collection restored, we expect rental growth, development completions and fixed debt costs to support continued, progressive, fully covered dividend growth.