EBIT of SEK 141m, 65% above ABGSCe

Weaker pulp price outlook short term

EV/CE of 1.3x and ’19e ATRoCE of 17%

EBIT of SEK 141m was 65% above ABGSCe
Q1 reported EBIT came in at SEK 141m, 65% above ABGSCe and was a record result for the group. Excluding a positive one-off of SEK 14m, clean EBIT was SEK 127m, 49% above ABGSCe at SEK 86m. The deviation seems to be driven by higher realised prices and lower variable costs. As a result, we raise our ’19e and ’20e estimates. The biggest effects y-o-y in the quarter were SEK 85 from higher prices and FX, SEK 12m from pulp price hedges, SEK -21m from higher variable costs, SEK -20m from higher fixed costs and SEK 14m from sale of emission rights.

Pulp price decline due to weak demand and high inventories
The European pulp price was up 30% in 2018 to an all-time high of USD 1,230/t. Since then, the price has dropped ~10% to USD 1,070/t, while Chinese prices are down 10-20%. Weak demand growth in ’18, of only 0.1% vs. ~3% p.a. historically, has resulted in record-high inventories. Leading indicators for macro growth still point down, which could mean low demand growth in ’19 too. The positive is that supply growth will be only 1.5% p.a. in ’19 and ’20. We still expect negative price pressure, but are still at historically high levels. A weak SEK vs. USD is also positive.

Future outlook and valuation
Rottneros has just completed a major investment programme, where it invested ~SEK 900m or ~50% of EV in higher capacity, improved efficiency and a new packaging business area. Production has increased by 15% and Rottneros now targets annual growth of 3%. The new packaging plant is up and running, but is unlikely to have any earnings impact short term. By 2023, Rottneros targets that 10% of sales should come from new sources, e.g. packaging and biofuels. Rottneros is trading ~15% below peers on an average of ’18, ’19 and ’20 multiples. EV/CE is 1.3x above its historical average of 0.7x but ‘19e ATRoCE of 17% is also significantly above the h
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