NSKOG – TOP IDEA at Pareto and Sparebank

We have been very bullish on Norske Skog. Pareto and Sparebank has added today NSKOG to their top ideas:

Pareto Securities today:

Pareto Securities Top Ideas for Norway published today:

Equity Portfolio Norway – May closed out Q1 reporting season and global equity markets were flattish with inflation in focus. Our portfolio returned 1.5% m/m, falling short of OSEBX at 2.8% m/m – but remain ahead of the index for the year. Our best performer FLNG (+26.0%) was countered by three shares trading down double digits (BWE, ICEGR and OHT). Five stocks beat the index in May. For June, we make eight changes to our portfolio, replacing AKER, BWE, FLNG, ICEGR, KIT, MWTR, OHT and VOLUE with ACC, BONHR, BWLPG, DNO, ELK, HUNT, NSKOG and PEXIP, keeping AFG and AUSS.

NSKOG NO – Attractive valuation support on the tail of earnings trough

We find a significant revaluation potential, as the market moves out of the trough and profitability for NSKOG’s legacy business improves. A support that should crystalize with new publication paper prices announced early July. Here, NSKOG targets 15-20% price uplift for H2’21 and into 2022, which seems likely following 3.3mt capacity cuts for the industry (about 20% of total market). Valuation is undemanding, trading at 4.1x EV/EBITDA’22E (incl. the 26% stake in Circa) at consensus estimate. Our SOTP of NOK 64/share, leaves ~80% upside to the share price. With more project updates expected throughout the year, combined with recovering publication paper prices, we find the entry point highly attractive. We reiterate Buy, TP NOK 50.

Sparebank Research today:

SB1M TOP PICKS FOR JUNE: BUY: We add Xplra, Hexagon Composites, Cadeler, Okea, Yara, and keep SATS, Schibsted, Norske Skog, Lerøy Seafood. Removiing Salmar, Telenor, Genel, Subsea 7 and Circa Group. SELL: Avanza (new), Hexagon Purus (new), XXL, SAS. Removing ITM Power, DNO, KOA and Fjordkraft

Newsprint prices could normalise in 2H 2021 -> material upside for the NSKOG share, in our mind

We estimate that run-rate EBITDA could be around “over-the-cycle” EBITDA of NOK1bn in 2H 2021

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.
• We 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 mind
• Accretive 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).
Source: NSKOG, SpareBank 1 Markets, RISI and Bloomberg *old corrugated container

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