Arctic Paper — Resilient FY23 masked by record comparator

Arctic Paper (WSE: ATC)

Last close As at 24/04/2024

PLN21.46

−0.22 (−1.01%)

Market capitalisation

PLN1,487m

More on this equity

Research: Industrials

Arctic Paper — Resilient FY23 masked by record comparator

FY23 was a year with numerous obstacles for the European paper and pulp industry, including lower demand due to an economic downturn and customer destocking. Nevertheless, Arctic Paper’s performance was resilient, with an EBITDA margin of 13%, substantially higher than the long-run historical average, although this is somewhat masked by a record comparator year. The strength of the balance sheet was maintained with net cash of PLN348m, which should bolster the company’s capex programme, focused on diversifying into the higher-margin renewable energy and packaging markets and moving up the value chain.

Natalya Davies

Written by

Natalya Davies

Analyst

Industrials

Arctic Paper

Resilient FY23 masked by record comparator

Paper and pulp

Spotlight - Update

15 February 2024

Price

PLN21.7

Market cap

PLN1.5bn

Share price graph

Share details

Code

ATC

Listing

Warsaw SE, Nasdaq Stockholm

Shares in issue

69.3m

Net cash as 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

FY23 was a year with numerous obstacles for the European paper and pulp industry, including lower demand due to an economic downturn and customer destocking. Nevertheless, Arctic Paper’s performance was resilient, with an EBITDA margin of 13%, substantially higher than the long-run historical average, although this is somewhat masked by a record comparator year. The strength of the balance sheet was maintained with net cash of PLN348m, which should bolster the company’s capex programme, focused on diversifying into the higher-margin renewable energy and packaging markets and moving up the value chain.

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

12.1

1.8

12/22

4,894

928

9.1

2.7

2.4

12.4

12/23e

3,486

333

3.5

2.2

6.2

10.1

12/24e

3,584

283

2.9

1.1

7.5

5.1

Source: Refinitiv. Note: FY23 report set to be published on 4 April.

Sturdy performance despite cyclical weakness

Despite sequential declines in the demand and price of paper and pulp in Europe in FY23, effective cost control measures shielded margins. The EBITDA margin of 13.4% (paper: 15.3%) was substantially higher than the long-run historical average of 10%. European pulp prices now appear to be on an upward trajectory, with paper prices following with a slight lag; NBSK pulp list price reached $1,300 in January 2024 (cyclical low of $1,145 in Q323). FY23 revenue declined 27% to PLN3.5bn compared to PLN4.9bn in its record FY22 (paper saw a 31% fall as customers continued to reduce inventory) and EBITDA stood at PLN475.3m, 51% lower y-o-y. Despite these seemingly drastic y-o-y declines, EBITDA and net income have increased by 71% and 118% vs FY19, with a 450bp increase in EBITDA margin.

Focus on moving up the value chain

Arctic’s strategy has allowed for a period of cyclical weakness, bolstered by a strong balance sheet with record FY23 net cash of PLN348m. In 2023 it made the decision to invest SEK286m in upgrading the Grycksbo biofuel boiler and steam turbine, which will increase energy output and produce c 50kt of wood pellets annually (expected annual revenue of SEK100m). Also, the new moulded cellulose fibre packaging plant in Kostrzyn is expected to be active from Q324, with anticipated annual revenue of c PLN60m at full capacity. Arctic’s strategy is based on increased diversification and better vertical integration to mitigate the long-term decline in paper demand.

Valuation: Wide discount to peers

Based on its consensus FY23e P/E (6.2x) and EV/EBITDA (3.2x), Arctic trades at discounts of 44% and 52% to European paper and packaging peers. The disparity may reflect the current business structure (mainly lower value-add pulp and paper), whereas peers are operating historically higher-margin packaging businesses.

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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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.

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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

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

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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