Q2 EBITDA of PLN 69m was in line with the company's expectations in the PW on 3 August, but below ABGSCe of PLN 112m. The miss was driven by lower paper volumes (97kt vs. ABGSCe of 113kt) as the effect of weaker demand and destocking was stronger than anticipated. Note that most P&P companies reported volume-driven misses in Q2. The company announced a PLN 110m investment for the Grycksbo biofuel installation. This investment is expected to generate cost savings of ~PLN 20m p.a. and we estimate EBIT of PLN 3-6m from wood pellet sales. We expect Q3 Paper EBITDA roughly in line with Q2 (PLN 50m) as lower paper prices should be offset by lower pulp costs and slightly higher volumes. Pulp should be weaker driven by lower pulp prices and more maintenance.
More paper capacity cuts needed
Paper prices surged to unprecedented levels in '22 due to elevated energy/RCP prices. This doubled the marginal producers' cash cost, and paper prices rose 100%. Now, energy/RCP prices have plunged 65-85%. Average paper prices are down ~20% from the peak, while fine paper prices are holding up better (-10%). Paper demand is down 20-30% y-o-y, due to destocking and weaker demand, and the market balance is under pressure. Based on announced capacity cuts to date, the capacity utilisation for fine paper could reach ~70%, and more curtailments are needed. These market fundamentals suggest lower fine paper prices. The good news is that Arctic Paper is a leading premium design/book paper player, with an overall decent position on the cash cost curve, and pulp prices in Europe are down ~35%.
Fair value range of SEK 35-80
The company is trading at an EV/CE multiple of 0.8x and a '24e EV/EBIT of ~6x. We estimate a fair value range of SEK 35-80, implying an EV/CE range of 0.7x-1.4x, or a '24e EV/EBIT of 5x-10x.
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