SpareBank joins Pareto by adding Norske Skog into Top Pick Portfolio for September

SpareBank and Pareto have in their Top Pick portfolio for September jointly just one stock – Norske Skog.

Two days ago I wrote here about Pareto strategic portfolio for September. I enclose below SpareBank Top Pick summary. As mentioned above, there is just one stock that is in both Top Pick portfolios – Norske Skog.

I enclose below SpareBank justification for adding the NSKOG into their Top Picks:

Newsprint and containerboard prices up 15-20% and marginal change up for input costs

The closures of capacity have rebalanced supply demand and according
to our knowledge, newsprint prices in Europe has had an material
increase in July. Q2 was a disappointment due to higher costs for
recovered paper (RCP), but RCP prices have been flat the last month.
Cost increases are front-end loaded.

The effect of the closures and hence increased utilisation have
according to our knowledge led to a material increase in prices for
newsprint in Europe. Our take is that the share prices for peers to
NSKOG have increased the last month due to this price increase with
NSKOG lagging peers. The enterprise value of NSKOG is small compared
to peers and NSKOG has a large investment programme starting in Q3
2021, but still we argue the disconnect to peers is unwarranted.

Overall, we expect prices for NSKOG will increase 15% compared to Q2
2021 for Q4 2021 and around 10% in Q3 2021 as some contracts will
have price increases later in Q3 2021. From Q4 2021, with 15% price
increase, flat RCP prices and higher gas prices, we expect NSKOG to
deliver an annualised EBITDA close to NOK1bn. If valued in line with
peers, we argue that a fair share price is NOK closer to NOK100
. The
conversion to containerboard is in our mind a step towards being
valued in line as a going-concern. As the majority of the current
portfolio for NSKOG is exposed to a declining market, we value NSKOG
based on a “5% decline in demand” scenario and view NOK50 as a fair
target price.

We recommend buying NSKOG ahead of the Q3 numbers as we expect
this quarter will show the effect of increased utilisation/prices and the
path to a NOK1bn EBITDA scenario.

SpareBank Top Pick portfolio:

Our analysisWe are getting closer to the end of the bull-cycle. Since the stock market bottomed out in March of 2020, MSCI World is up 96%, which compares to the median bull-market run of 88% since 1970. At P/B 2.86x, the Norwegian equity market is valued close to historical peak levels (3.0x before the 2008 financial crisis. Shiller P/E is at its highest since the tech bubble. But, what is the alternative investment with negative real 10-yrs interest rates?

Strong macro indicators, why worry now? Market crashes typically occur after a significant macro-economic weakening. For now, macro indicators support growth Our correction risk indicators are still neutral to positive (yellow/green). There is still significant earnings momentum, and 12m forward EPS for Norwegian and international markets are above pre-Covid levels as the economic growth continues.

Our portfolio is tilted towards financials, materials (early-cycle), IT (mid-cycle), and consumer staples, energy and materials (late cycle). SpareBank 1 SR-Bank, Webstep, Europris, Yara, Norsk Hydro, Circa Group, Norway Royal Salmon, Norske Skog, Equinor and Orkla

Note that our previous “long/short” Top Picks monthly portfolio is discontinued. Note also that we do not have analyst coverage of NRS, but would like the portfolio to have seafood exposure.

Disclosure: I am long NSKOG. I have been very bullish the stock, as the paper restructuring was know and the effects have been expected. I believe we are now entering the delivery phase.

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