Rottneros - Q2e: Tailwinds from higher prices and FX - ABG

Q2e EBIT of SEK 159m Pulp prices at ATH, but more supply into ‘23e Fair value range of SEK 10-15/share Q2 EBIT likely up q-o-q (higher pulp prices) Q1 EBIT was SEK 145m. The q-o-q effects are likely: SEK +20-25m from higher prices, SEK +15m from FX, SEK -10-15m from higher transport/chemical prices, SEK -10m from higher pulpwood costs. We arrive at SEK 159m for Q2'22e. As such, we expect Q2 to be another strong quarter for the company. Volumes and maintenance should be flat q-o-q, whilst FX and the surge in pulp prices are likely to impact positively. This is partly offset by higher chemicals prices and pulpwood costs. The latter effect is likely to lead to more headwinds into H2’22 as prices have been announced up 25-45% from June. Note that the company’s FX sensitivity is high (a 10% change in SEK vs. USD has an annualised impact of ~SEK 120m on EBIT) and YTD figures are positively affected by USD tailwinds. Rottneros will present its Q2 report on 22 July. Pulp prices at ATH, but more supply into ‘23e Pulp prices in Europe have risen above their 2021 peak to USD 1,435/t. Chinese pulp prices have risen ~45% since November. The pulp market appears tight short-term (supply disruptions) and price hikes of ~4% have been announced. Note that our leading indicator for OECD IP growth is pointing down and pulp prices usually follow IP growth with a lag. Supply growth has been reduced to 2% in ’22e (delayed projects), but supply growth could become problematic at +5% in ’23e. Market pulp shipments have grown by 2-3% p.a., aided by megatrends driving demand for packaging and tissue. Valuation – fair value range of SEK 10-15/share Rottneros is trading at an EV/CE of 1.1x vs. 0.8x historically, but we note its earnings are higher vs. history. ATRoCE averaged ~11.7% from ’15-’20, and we estimate ~13.0% for ’22-’24. By using a WACC of 9% and the Q1’22 CE of SEK 1.7bn, we find a fair value of ~SEK 15/sh. Mid-cycle valuation points to SEK 8-12/share, while historical margins point to SEK ... Läs mer på ABG Sundal Collier