Arctic Paper — FY23 focused on margin management

Arctic Paper (WSE: ATC)

Last close As at 18/05/2024

PLN22.00

0.50 (2.33%)

Market capitalisation

PLN1,525m

More on this equity

Research: Industrials

Arctic Paper — FY23 focused on margin management

Arctic Paper’s FY23 results highlight the resilience of its business model in a year 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. The FY23 EBITDA margin stood at 13%, substantially higher than the historical average of 10%. The cash flow and balance sheet remained strong with net cash of PLN348m, an increase from the FY22 level (PLN276m).

Natalya Davies

Written by

Natalya Davies

Analyst

Industrials

Arctic Paper

FY23 focused on margin management

Paper and pulp

Spotlight - Update

16 April 2024

Price

PLN21.36

Market cap

PLN1.5bn

Share price graph

Share details

Code

ATC

Listings

Warsaw SE, Nasdaq Stockholm

Shares in issue

69.3m

Net cash at 31 December 2023

PLN348m

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

Andrew Keen

+44 (0)20 3077 5700

Arctic Paper is a research client of Edison Investment Research Limited

Arctic Paper’s FY23 results highlight the resilience of its business model in a year 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. The FY23 EBITDA margin stood at 13%, substantially higher than the historical average of 10%. The cash flow and balance sheet remained strong with net cash of PLN348m, an increase from the FY22 level (PLN276m).

Consensus estimates

Year
end

Revenue
(PLNm)

PBT
(PLNm)

EPS
(PLN)

DPS
(PLN)

P/E
(x)

Yield
(%)

12/22

4,894

928

9.1

2.7

2.3

12.6

12/23

3,549

341

3.6

1.0

5.9

4.7

12/24e

3,584

283

2.9

1.1

7.4

5.1

12/25e

3,737

328

3.5

1.2

6.1

5.6

Source: LSEG

Signs of recovery from cyclical lows

FY23 saw sequential declines in both demand and the price of paper and pulp in Europe, directly affecting Arctic’s financial performance versus a record comparator year. Revenue declined 28% y-o-y to PLN3.5bn (the paper segment saw a 31% fall as customers continued to reduce inventory). EBITDA was PLN475.3m, 51% lower than FY22 (PLN974.0m) with a corresponding margin of 13.4% (FY22: 20%), albeit notably higher than the long-run historical average of 10%. Paper EBITDA margins stood at 15.3% (FY22: 19.1%). Despite the macroeconomic headwinds, Arctic maintained a robust balance sheet with period-end net cash of PLN347.5m and equity/assets of 66%. The outlook appears more positive, with a visible recovery in pulp prices (paper prices follow with a slight time lag). The NBSK pulp list price reached $1,300/tonne in January 2024 versus a cyclical low of $1,145 in Q323.

Continued transition to reflect market trends

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 chemical thermomechanical 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 FY25e P/E of 6.1x and EV/EBITDA of 3.2x, Arctic Paper trades at discounts of 49% and 55%, respectively, to European paper and packaging peers. Successful delivery of the 4P strategy, with increased exposure to higher-margin renewable energy and packaging markets, should see the discount progressively diminish.

Resilient FY23 faced with increasing challenges

FY23 presented 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. While FY23 saw revenue decline by 27.5% to PLN3.5bn against the very strong record comparator year, it represented a 4% increase compared to FY21. The gross profit and EBITDA margins stood at 21.0% and 13.4%, compared to 28.8% and 19.9%, respectively, in FY22, with the decline attributable to high fixed costs matched with decreased paper and pulp sales. Despite this, the EBITDA margin substantially exceeded the long-run historical average of 10%, through the implementation of cost containment measures and adjusting mill capacity to match demand.

Arctic Paper’s strategy has allowed for a period of cyclical weakness as it repositions the business and the company’s balance sheet remains robust, with FY23 net cash of PLN347.5m, which will enable Arctic to proceed with its extensive capex programme and new investments in line with its long-term 4P strategy to diversify into the renewable energy and packaging markets.

Exhibit 1: Income statement summary (continuing operations)

PLNm

FY21

FY22

FY23

% change: FY23/FY22

Group sales

3,412.6

4,894.3

3,549.2

-27.5%

Gross profit

707.9

1410.8

745.7

-47.1%

Gross margin

20.7%

28.8%

21.0%

-

Group EBITDA

327.8

974.0

475.3

-51.2%

Group EBITDA margin

9.6%

19.9%

13.4%

-

EBIT

244.6

843.0

357.1

-57.6%

EBIT margin

7.2%

17.2%

10.1%

-

Profit before tax

223.1

927.6

340.9

-63.2%

Net income

127.2%

756.8

272.4

-64.0%

EPS (PLN)

1.8

9.1

3.6

-60.8%

Source: Arctic Paper reports

Despite paper revenue declining modestly in Q423 (PLN581.2m) compared to the previous quarter (PLN590.3m), divisional EBITDA rose by 26.6% to PLN119.8m, yielding a margin of 15.3% – substantially higher than its historical average. This was more than offset by a weak performance in the pulp segment with an EBITDA loss of SEK76m, contributing to a group EBITDA decline of 23% q-o-q to PLN96.3m in Q423. The pulp segment suffered notably due to a continuation of subdued pulp prices, higher variable costs and the annual maintenance shutdown in Vallvik.

Exhibit 2: Revenue (PLNm) and EBITDA margins (%), FY18–23

Exhibit 3: Pulp and paper EBITDA margins (%), Q220–Q423

Source: Arctic Paper reports

Source: Arctic Paper reports

Exhibit 2: Revenue (PLNm) and EBITDA margins (%), FY18–23

Source: Arctic Paper reports

Exhibit 3: Pulp and paper EBITDA margins (%), Q220–Q423

Source: Arctic Paper reports

Paper capacity utilisation picked up sequentially from its all-time low of 55% in Q223 (which equates to a total sales volume of 97kt) to 70% (total sales volume of 113kt). The company will continue adjusting its capacity to meet profitable customer demand in line with its strategy and long-term market outlook.

Exhibit 4: Total sales volume (kt) and production capacity (%) of paper, Q419–Q423

Source: Arctic Paper reports

Balance sheet strength enables revenue stream diversification

Despite strong macroeconomic headwinds during 2023, Arctic Paper has showcased its ability to maintain a robust balance sheet, with year-end net cash of PLN347.5m (increase of 25.8% y-o-y) and equity/assets of 66%. This puts the company in a favourable position to continue with its extensive capex programme, investing to diversify the business and expand into the higher-margin and growing renewable energy and packaging markets, in line with its 4P strategy; the green economy and sustainability remain at the heart of Arctic’s strategy. If the strategy is successful, the business should become less commoditised, reducing earnings and cash flow volatility and improving margins.

Outlook: Continuing to transition the business model

FY24 should see continued capex in line with the 4P strategy, focused on diversifying the business model into higher-margin renewable energy and packaging markets. Projects set to unfold in the year include the new JV with Rottneros in moulded fibre tray production in Kostrzyn and increased energy generation from internal production processes (targeting 100% by 2030). This also presents a new revenue stream through selling in-house energy to third parties. By 2026, the capacity of Arctic’s renewable energy sources is targeted to reach 25MW, and 80MW by 2030.

In addition, the company announced in FY23 that it is investing SEK285m (c €24m) in the expansion and upgrade of its biofuel installation at the Grycksbo paper mill. Not only is this expected to reduce energy costs by c SEK50m on an annual basis, but the installation will also produce 50kt of wood pellets (made of residuals from sawmills) at an estimated value of SEK100m per year to be sold on the market. Plans have been made to further increase production to more than 100kt later down the line. This project is estimated to be completed in H125.


Exhibit 5: Expected capex 2024–30

Exhibit 6: Targeted EBITDA split in 2030

Source: Arctic Paper reports

Source: Arctic Paper reports

Exhibit 5: Expected capex 2024–30

Source: Arctic Paper reports

Exhibit 6: Targeted EBITDA split in 2030

Source: Arctic Paper reports

The outlook for FY24 appears increasingly positive, with a visible recovery in pulp prices (paper prices follow with a slight time lag). The NBSK pulp list price reached $1,300/tonne in January 2024 compared to its cyclical low price of $1,145/tonne in Q323. Customer destocking is transient and pulp revenue and EBITDA levels should improve as the business cycle continues to take a more favourable turn.

The company’s expansion into the higher value-add packaging business should boost consolidated margins (versus c 10% historical average) and improve earnings visibility through the economic and commodity cycles, allowing it to capture the higher end of the value chain and to achieve better diversification and vertical integration.

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 2024 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

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 2024 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

More on Arctic Paper

View All

Latest from the Industrials sector

View All Industrials content

Research: Consumer

Domino’s Pizza — Growing the base

Domino’s Pizza Group’s (DOM’s) new CEO has set an ambitious long-term growth target, including an acceleration in its net store opening programme. With better alignment between the company and its franchisees, management believes DOM should be capable of generating improved profit growth, versus that achieved in recent years, and potential higher returns.

Continue Reading

Subscribe to Edison

Get access to the very latest content matched to your personal investment style.

Sign up for free