Last close As at 05/08/2026
PLN6.24
▲ −0.12 (−1.89%)
Market capitalisation
PLN433m
Research: Industrials
Arctic Paper’s H123 results reflect dampened demand, with customer destocking, alongside sequential price declines seen across the entirety of the European paper and pulp market. Deliveries of its products were substantially below estimated end-use demand, and global commodity prices, such as for pulp and energy, fell from historical highs to cyclical lows in the six-month period. Despite a weaker H123 versus a record strong comparator, Arctic has maintained a robust balance sheet enabling it to continue its diversification into the higher-margin energy and packaging markets and move up the value chain.
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Arctic Paper |
Strategy on track despite cyclical weakness
Industrials |
Spotlight - Update
15 August 2023 |
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Arctic Paper is a research client of Edison Investment Research Limited |
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Arctic Paper’s H123 results reflect dampened demand, with customer destocking, alongside sequential price declines seen across the entirety of the European paper and pulp market. Deliveries of its products were substantially below estimated end-use demand, and global commodity prices, such as for pulp and energy, fell from historical highs to cyclical lows in the six-month period. Despite a weaker H123 versus a record strong comparator, Arctic has maintained a robust balance sheet enabling it to continue its diversification into the higher-margin energy and packaging markets and move up the value chain.
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Consensus estimates
Source: Company reports, Refinitiv |
Challenging period for the industry
The first half of FY23 saw sequential declines in both demand and price of paper and pulp in Europe, directly affecting Arctic Paper’s financial performance versus a record comparator year. European pulp prices are now significantly lower than FY22 (a record year) and remain on a downward trajectory, with paper prices following with a slight time lag. In H123, revenue declined 22.4% to PLN1.9bn compared to PLN2.4bn in its record H122 period (paper segment saw a 27% fall as customers continued to reduce inventory). EBITDA was PLN254.5m (H122: PLN535.8m), 53% lower than H122 with a corresponding margin of 13.6% (H122: 22.3%). Despite the macroeconomic headwinds, Arctic maintained a robust balance sheet with period-end net cash of PLN134m and equity/assets of 66%.
Investing for value accretive growth
Arctic Paper’s continued robust balance sheet provides freedom to make the necessary investment for diversification of revenue streams; in Q223 Arctic strategically invested SEK286m in expanding and upgrading the Grycksbo biofuel boiler and steam turbine. This will increase both energy output and flexibility, alongside producing 50k tonnes of wood pellets annually, which can be sold to third parties, with expected annual revenue of c SEK100m. By continuing to provide alternative solutions to mitigate the declining long-term paper demand, this evolution should enable Arctic to successfully capture the higher end of the value chain and to achieve better diversification and vertical integration.
Valuation: Discount to peers
Based on its consensus FY24e P/E (5.6x) and EV/EBITDA (3.0x), Arctic Paper trades at discounts of 57% and 59% 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 higher-margin packaging businesses.
H123 results dampened by sector headwinds
H123 was 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. Q223, in particular, was affected by these macroeconomic headwinds, with persistently high input costs and sector-wide declines in demand putting pressure on margins. While the first six months of FY23 saw revenue decline 22.4% to PLN1.9bn against the very strong H122 performance, it represented a 19.1% increase compared to H121. H123 gross profit and EBITDA margin stood at 22% and 14% compared to 31% and 22% in H122, respectively, with the substantial decrease attributable to high fixed costs matched with decreased paper and pulp sales. In light of these results, FY23 consensus revenue and EBITDA forecasts decreased 9.6% and 24.3%, respectively.
Arctic Paper’s strategy has allowed for a period of cyclical weakness as it repositions its business, and the company’s balance sheet remains robust with Q223 net cash of PLN134m, 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 energy and packaging markets.
Exhibit 1: Arctic Paper H123 income statement summary
Six months to June (PLNm) |
H122 |
H123 |
Year-on-year change |
Group sales |
2,407.0 |
1,868.5 |
-22.4% |
Gross profit |
755.7 |
411.0 |
-45.6% |
Gross margin |
31.4% |
22.0% |
- |
Group EBITDA |
535.8 |
254.5 |
-52.5% |
Group EBITDA margin |
22.3% |
13.6% |
- |
EBIT |
474.1 |
195.0 |
-58.9% |
EBIT margin |
19.7% |
10.4% |
- |
Profit before tax |
473.7 |
205.8 |
-56.6% |
Net income |
400.5 |
173.7 |
-56.6% |
EPS (PLN) |
4.9 |
2.1 |
-57.6% |
Source: Company reports
The second quarter of 2023 was a particularly challenging period as demand weakened alongside industry-wide extraordinary customer destocking in product value chains compared to the Q2 last year. For the paper segment, revenues amounted to PLN566.7m (Q222: PLN948.6m) as customers reduced inventories. As a result of management’s adaptive focus on margins, paper production capacity was at an all-time low of 55% (which equates to total sales volume of 97kt), in line with the wider sector, albeit income per tonne (PLN5,850) remained in line with Q222 (PLN5,740). The company will continue adjusting its capacity to meet profitable customer demand in line with its strategy and long-term market outlook.
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Exhibit 3: Total sales volume (kt) and production capacity (%) of paper, Q419–Q223 |
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Source: Company reports |
In H123 the pulp segment (Rottneros) saw revenue and EBITDA decline by 9.3% and 45.9% to PLN579.5m and PLN96.5m, respectively, driven by a challenging pulp market and further price declines primarily in the second quarter. Chemical pulp market prices were historically high during H222 and declined rapidly to estimated bottom-of-the-cycle levels during H123, attributable to the weakening global demand for paper, and held back by significant destocking in various product value chains; in Q223, average NBSK and BHKP pulp prices were lower by 5.3% and 11.9% respectively compared to Q222. However, customer destocking is transient and pulp revenue and EBITDA levels should improve when the business cycle takes a more favourable turn.
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Exhibit 2: Quarterly revenue, EBITDA and EBITDA margins: Q120–Q223 |
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Source: Company reports. *Note: Long-run five-year historical EBITDA margin average of 10%. |
Robust balance sheet enables diversification of revenue streams
Despite strong macroeconomic headwinds during the first half of 2023, Arctic Paper has showcased its ability to maintain a robust balance sheet, with Q223 net cash of PLN134m 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 (see our recent initiation note); 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.
Consistent with this, the company has announced 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. This project is estimated to be completed in H125. Diversifying the business and expanding into the power division should enable Arctic to successfully manage market fluctuations, build on modernisation and innovation, meet growing market demand for renewable energy and address challenges in light of the structural decline in the paper market.
Outlook: Focus on developing future growth opportunities
As a result of the conditions experienced over the previous three trading quarters, management’s expectations for FY23 are less favourable than it anticipated at the start of the year. Arctic Paper will continue to face the reduced demand for high-grade paper in Europe at a time of geopolitical uncertainty, high energy prices and elevated inflation, which will continue to affect order levels at the paper mills and production capacity. However, we expect customer destocking to be transient and to turn around as the business cycle starts to take a more favourable turn.
The group’s main strategic financial objectives for 2022–30 remain unchanged:
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revenue growth of 25%,
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an increase in EBITDA of c 70%, and
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an increase in EBITDA margin to 15%.
As mentioned in our previous note, the total investment over the period to achieve these ambitions is planned at more than PLN1.5bn, of which 37% will be allocated to new business areas. Management expects the investment programme to provide a more optimised balance sheet structure, and assumes that the company will achieve carbon neutrality by 2035 at the latest.
By growing its renewables portfolio and expanding into the higher-margin packaging market, in line with the company’s 4P strategy, Arctic can mitigate the declining long-term paper demand and successfully move up the value chain and become less commoditised. If the strategy is successful, and when the positive long-term drivers and growth prospects of the business are in place, there may be a turn in investor sentiment with the potential for a re-rating.
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Research: Real Estate
A trading update from Phoenix Spree Deutschland (PSD) shows that the core rental business remained strong in H123 although property values declined further, and transactions activity remains subdued. It notes some recent signs of improved buyer interest in the condominium market, but it remains too early to call a turn. We will review our estimates when interim results are released in late September. H123 rental growth is ahead of our expectations but revaluation indicates downwards pressure on forecast NAV. Our forecasts are yet to reflect the adjusted adviser fee structure.