Congratulations to all that followed my Energy Recovery idea published few months ago. The share price is up 200%. ERII is our largest position. I believe we are still at the early stage, as the company revealing new products in new industries almost every quarter. I believe the share price should multiply in the next 3 years. Do look at their presentation
After Friday results beat by Norske Skog, the brokerage houses rerate NSKOG. They are bullish both on higher paper prices due to recent industry closures as well as they are starting to recognize the strength of the new green project portfolio. We are long NSKOG and we are quite bullish. Our target is 60 NOK by the end of the year +55% from current levels:
AGB Research on NSKOG:
|Q1 better than expected, hope for normalisation |
Clean EBITDA of NOK 80m was better than expected. Q1 showed a negative price effect, partly offset by cost savings and CO2 compensation. Norske Skog has suffered from COVID-19-related lockdowns as paper volumes fell 19% in ‘20. Its EBITDA margin has declined from previously 9% to 5% in Q1’21 and we expect it to decline further in Q2 due to FX and higher RCP prices. However, our paper price model points up 12-15% into ’22 due to capacity cuts and higher pulp prices (UPM and Norske talk about 15-20% on newsprint). This means that EBITDA is likely to increase towards a normalised paper margin of 7-8% into 2022. In addition, CO2-related payments amount to ~NOK 350m, and should provide an EBITDA floor. The CO2 payments could rise ~NOK 300m into ’22/’23 from higher CO2 prices and more allowances. We stick to BUY. TP up to NOK 42 (37).A pipeline of growth projects: ~NOK 66/share
Norske Skog has several growth projects in the pipeline that could more than double EBITDA. The key projects are paper to packaging conversion and the new waste-to-energy facility, which could add NOK 650m and NOK 200m, respectively, with remaining capex of ~NOK 4bn. We arrive at a discounted value of NOK 66/share. Approximate values would be NOK 30/share for the existing Paper assets, NOK 25/share for the packaging conversion and NOK 12/share for the waste-to-energy facility. This calculation does not include the potential from its other projects, which could lift the values higher (read more in report).Conversion projects could be lucrative
Paper to packaging conversion projects can be highly lucrative as margins and capacity double, while capex is very reasonable. The risk is that debt will increase significantly. Then, we have to wait until ’24-‘25 to see how much higher the EBITDA will be.
SpareBank on NSKOG:
|Newsprint prices could normalise in 2H 2021 -> material upside for the NSKOG share, in our mind|
We keep our Buy recommendation and NOK50 target price after the Q1 2021 report. The key reasons why we recommend buying NKSOG is i) NSKOG is in our mind an acquisition target, ii) newsprint prices are increasing in Asia/North America and we argue that this is will affect newsprint prices in Europe from 2H 2021 (management comments at the Q1 2021 presentation supports our view) and iii) we estimate that the conversion from newsprint to container board is accretive for shareholders in NSKOG. The main concern for investors in NSKOG is in our mind lack of cash flow to cover capex and risk for capex overruns. We expect that cash flows will increase with a stronger market and argue that the risk profile for the conversion capex is not as high as investors interpret. With newsprint prices 15% below 2019 level and an EBITDA-margin around 11%, NSKOG’s market cap could increase with NOK5.7bn – which is more than the containerboard conversion capex -> attractive risk/reward, in our mind.
Our analysisWe would not be surprised if NKSOG is acquired by StoraEnso.
Our take is that NSKOG fits well with StoraEnso as i) StoraEnso is currently evaluating a consumer board investment in Skoghall with an estimated capex of EUR800 to 850m, ii) StoraEnso expects growth from building solutions and biomaterials (fit with NSKOG’s Circa, Cebina, bio-composites and FibreMatrix) and iii) a NSKOG acquisition would be a small ad-on for StoraEnso (NSKOG’s market cap is 3% of StoraEnso’s market cap). In addition, we estimate that OceanWood, which owns 42.85% of NSKOG has an IRR of 16% if it exits its investment at current market cap.
Newsprint prices expected up from 2H 2021 – prices have started to increase in Asia/North America.
Our take is that more than 25% of newsprint capacity will be taken out in 2020/2021 (based on announcements from UPM, StoraEnso and SCA). Our take is that this will have a positive effect on prices from 2H 2021. The effect of lower supply has in our mind had an effect on prices, especially in Asia, and according to our knowledge NKSOG is now exporting to exporting to Asia. Our assumption on higher prices as production is down is supported by statements from RISI the last months commenting in the price increases in Asia and this will most likely affect Europe from 2H 2021.
Management comments at the Q1 2021 presentation supports our view, in our mindAccretive containerboard conversion we argue investors are too concerned about capex overruns and funding.
Based on the margin competitors are reporting, we argue that the containerboard conversion is accretive for NSKOG. The capex for NKSOG is sizable compared to its size, but we that expect cash flow from operations and increased leverage will be sufficient to cover the capex from late 2021 to 1H 2023. The EUR350m containerboard conversion is a sizeable investment for NSKOG, but the capex should in our mind be split according to the risk for the different capex components. We have divided the capex into three risk categories and see low capex risk for increased storage capacity and water treatment (estimate EUR70m of capex) and medium risk for OCC* treatment (estimate EUR140m of capex) and higher risk for conversion capex (estimate EUR140m of capex).