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.
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Arctic Paper |
Packaging and power extension strategy
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Paper & packaging |
Deutsches Eigenkapitalforum 2021
8 November 2021 |
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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.
Source: Arctic Paper, Refinitiv. Note: *Consensus data based on one contributor. |
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Research: Investment Companies
Foresight Solar Fund (FSFL) is the largest solar investor listed in the UK by installed capacity. With power prices more than tripling in 2021, FSFL’s c 25% merchant share of revenues allows the fund to benefit from this increase. While a lower discount rate was the largest contributor to the NAV per share increase to 104.1p in Q321 (98.0p at end-June 2021), power prices were the key external factor affecting the NAV. FSFL provides investors with a covered, sustainable and growing dividend (including in 2020 amid depressed power prices), underpinned by subsidised assets in the UK and high-return growth opportunities globally. Given the solar industry’s huge growth potential across the world, National Grid expects the UK’s solar capacity to more than double within the next 10 years.