Arctic Paper — Advancing into new revenue streams

Arctic Paper (WSE: ATC)

Last close As at 19/06/2024

PLN22.82

0.16 (0.71%)

Market capitalisation

PLN1,582m

More on this equity

Research: Industrials

Arctic Paper — Advancing into new revenue streams

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.

Natalya Davies

Written by

Natalya Davies

Analyst

arctic paper4

Industrials

Arctic Paper

Advancing into new revenue streams

Industrials

Spotlight Update

7 November 2023

Price

PLN17.8

Market cap

PLN1.2bn

Share price graph

Share details

Code

ATC

Listings

Warsaw SE, Nasdaq Stockholm

Shares in issue

69.3m

Last reported net cash as at 30 September

PLN307m

Business description

Based in Poland, Arctic Paper is a paper producer (one of the leading producers of graphical paper in Europe) with three paper mills located in Poland and Sweden. It is the majority owner of Rottneros (51%) in Sweden, which complements the company’s portfolio with pulp, partly produced for its own paper products. Arctic Paper is listed in Warsaw (WSE) and Stockholm (Nasdaq).

Bull

Diversified model with four main areas of focus: paper, pulp, packaging and power (4P).

Investing PLN1.5bn in two new strategically important segments of renewable energy and packaging, targeting 25% revenue growth by 2030.

Strong balance sheet facilitates investment to support strategy.

Bear

Global inflationary pressure stifling customer confidence and demand.

Long-term structural decline in paper demand.

Relatively small free float of 32%.

Analysts

Natalya Davies

+44 (0)20 3077 5700

Andy Chambers

+44 (0)20 3077 5700

Arctic Paper is a research client of Edison Investment Research Limited

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.

Consensus estimates

Year
end

Revenue
(PLNm)

PBT
(PLNm)

EPS
(PLN)

DPS
(PLN)

P/E
(x)

Yield
(%)

12/21

3,413

223

1.8

0.4

9.9

2.3

12/22

4,894

928

9.1

2.7

2.0

15.2

12/23e

3,362

276

2.9

1.8

6.1

10.1

12/24e

3,389

217

2.1

0.9

8.5

5.1

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.

Exhibit 2: Quarterly revenue, EBITDA and EBITDA margins, Q121Q323

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.

General disclaimer and copyright

This report has been commissioned by Arctic Paper and prepared and issued by Edison, in consideration of a fee payable by Arctic Paper. 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.

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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 2023 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.

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United States

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London │ New York │ Frankfurt

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General disclaimer and copyright

This report has been commissioned by Arctic Paper and prepared and issued by Edison, in consideration of a fee payable by Arctic Paper. 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 2023 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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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