Arctic Paper — Resilient in a challenging market

Arctic Paper (WSE: ATC)

Last close As at 18/06/2024

PLN22.82

0.16 (0.71%)

Market capitalisation

PLN1,582m

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Research: Industrials

Arctic Paper — Resilient in a challenging market

Arctic Paper has continued to face the challenging market trends that affected Q422, with lower demand, higher input costs and higher prices across most of its segments in Q123. Management continued to proactively respond to the conditions and EBITDA was only 10% down on Q122 while sequentially much improved from Q422, up 32%. With customers naturally hesitant to lock in a higher pricing environment given the macroeconomic shocks and geopolitical uncertainty, demand now appears unlikely to bounce back sharply. Management is set to continue to focus on profitability and cash flows, providing operating leverage for when conditions do improve.

Natalya Davies

Written by

Natalya Davies

Analyst

arctic paper4

Industrials

Arctic Paper

Resilient Q123 in a challenging market

Pulp and paper production

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10 May 2023

Price

PLN19.66

Market cap

PLN1.36bn

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Share details

Code

ATC

Listings

Warsaw SE, Stockholm (Nasdaq)

Shares in issue

69.3m

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

An agile management and strategy allowing proactive responses to market developments.

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.

Lower returns projected through FY24.

Analysts

Natalya Davies

+44 (0)20 3077 5700

Andy Murphy

+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 has continued to face the challenging market trends that affected Q422, with lower demand, higher input costs and higher prices across most of its segments in Q123. Management continued to proactively respond to the conditions and EBITDA was only 10% down on Q122 while sequentially much improved from Q422, up 32%. With customers naturally hesitant to lock in a higher pricing environment given the macroeconomic shocks and geopolitical uncertainty, demand now appears unlikely to bounce back sharply. Management is set to continue to focus on profitability and cash flows, providing operating leverage for when conditions do improve.

Q123 results focus on profitability

In Q123 lower demand led to a 7% fall in group revenues to PLN1.03bn (Q122: PLN1.11bn), 4% down on Q422. Paper volumes of 113k ton were 32% down on Q122, when markets were strong, and were only down 3% on Q422. Pulp volumes actually improved to 87k ton, up 10% on Q422 but 13% lower than Q122. Pulp and paper prices showed signs of stabilising in Q123 with low single-digit declines during the period. Invoiced paper prices remained over 20% higher than Q122. Arctic buys-in pulp as well as selling its own pulp output. Management focus on cost control led to a significant sequential improvement in profits with EBITDA (PLN185.5m), EBIT (PLN155.6m) and net income up 33%, 42% and 76%, respectively, from Q422 and broadly c 10% below the strong Q122 result. EBITDA margin remained healthy at 18.0% (Q122: 18.5%). The group held net cash of PLN290m at Q123 (FY22: PLN307m).

Continuous transition to reflect market trends

Falling long-term demand in fine-grade paper is expected to continue and Arctic management continues to exploit its capabilities to mitigate the trend and transition to niche areas with greater stability. It has a leading position in book paper markets that remains relatively stable, although subject to the same macroeconomic trends that have moderated customer demand recently. In addition, it is seeking to develop products and segments, such as in non-graphic (packaging, technical) paper markets where it is investing to grow to c 20% of revenues over the next few years.

More cautious for FY23

Management’s outlook for FY23 is less favourable than had been anticipated at the start of the year. However, the resilient profitability and strong finances support the investment strategy, and the P/E rating is undemanding, with a healthy yield.

Consensus estimates

Year
end

Revenue
(PLNm)

PBT
(PLNm)

EPS
(PLN)

DPS
(PLN)

P/E
(x)

Yield
(%)

12/21

3,413

223

1.6

0.4

12.3

2.0

12/22

4,894

928

9.1

2.7

2.2

13.7

12/23e

4,442

651

6.5

2.6

3.0

13.2

12/24e

3,835

304

2.9

2.6

6.8

13.2

Source: Company reports, Refinitiv

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. Where Edison has used consensus estimates within this publication, we do not guarantee their accuracy or completeness.

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

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. Where Edison has used consensus estimates within this publication, we do not guarantee their accuracy or completeness.

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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