Norske Skog – Pareto ups its price target based on “Structural and cyclical earnings uptick ahead”

Summary of the Pareto Research is below:

Structural and cyclical earnings uptick ahead

The European publication paper market has responded well to the
strengthening of the economy and better than originally anticipated.

Limited supply of recycled paper and capacity closures have tightened
markets further, seeing additional price hikes into 2022. NSKOG’s legacy assets are thus set for a structural and cyclical earnings uptick, and we see potential for 6-7x quarters with consecutive earnings growth. Also, recycled containerboard is leaving ample upside where current market prices now imply ~2-3x higher EBITDA potential than initially estimated. Along with fibre/renewable energy projects running according to plan, we find the upside potential encouraging. We reiterate Buy and lift TP to NOK 60 (50).

NSKOG due to report Q3’21 results on 22 October at 7:00 CET
We expect Q3 EBITDA adj. of NOK 155m, up from NOK 17m in Q2. This driven by increased contract prices (raised 15-20% across all grades) as well as improved utilization. Though, partly offset by recent raw material cost hike.

EBITDA’22-23E up on improved market outlook
While we lower our EBITDA’21E due to soaring energy prices, we lift 2022-23E by 8-10% amid improving market outlook. Newsprint is short of supply, partly due to limited availability of recycled papers but also due better than expected demand. Along with capacity closures, the market has tightened further, and hence additional price uplifts are expected for 2022. And current energy and CO2 prices indicate an EBITDA effect of EUR ~30m from the WtE boiler, commencing in Q2’22 (vs. initial est. of EUR ~19m). We also raise price assumptions for recycled containerboard, as current market prices imply ~2-3x higher EBITDA potential than initially expected (first prod. in Q4’22).

Buy reiterated, TP up to NOK 60 (50)
We find a significant revaluation potential, as the market moves out of the trough and profitability for NSKOG’s legacy business improves. Valuation is undemanding, trading at 3.4x EV/EBITDA’22E (PAS est. adj. for CIRCA). With latest market development, we increase our SOTP valuation to NOK 76/sh.

Brokers are very bullish on NSKOG:

  1. Two weeks ago NSKOG was put Top Idea list for September by Pareto
  2. Sparebank put NSKOG on its top idea list last week. The analyst believes the Norske Skog share price should be three times higher. 
  3. Last week , Carnegie joined the NSKOG bulls with doubling its price target.

See my posts from last two weeks on the above events with details from each analyst report.

NSKOG Investment thesis summary:

  • it is very cheap vs its peers –  Sparebank research stated : “if valued in line with peers, we argue that a fair price is closer to NOK 100” that is 250% above its current share price.
  • its renewable asset portfolio has a higher value than NSKOG current market capitalization
  • Newsprint plant closures are pushing prices higher that should multiply NSKOG profitability
  • Renewable assets come into production next year (mainly renewable packaging), that should significantly improve profitability further
  • Doubling income from selling CO2 permits from 2022 to EURO 60 mln per year should improve profitability materially.

If interested, last week posts on this blog for summaries of Pareto and Sparebank research on Norske Skog

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