Norske Skog – Both Pareto and SpareBank confirms NSKOG as Top Pick for October

Every month Pareto Securities and Sparebank publish their top pick ideas for the month. Norske Skog is on both top idea lists – it is the only stock both houses rank as top idea. For both it is the second month in a row. I enclose below the justification for they presented.

SpareBank note on Norske Skog:

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

Power compensation alone could increase EBITDA with NOK250m, but political uncertainty (not included in estimates)

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.
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.

Pareto Securities note on Norske Skog in top pics

We keep NSKOG in our monthly portfolio. 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, currently trading at 3.4x
EV/EBITDA’22E (PAS est. adj. CIRCA stake).


My 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.

Norske Skog will be reporting Q3 next week. Should be major catalyst for the stock

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

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The goal of the blog is to provide investment ideas for further research. I/we have a beneficial position in the shares discussed above either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. The article does not represent investment advice.

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