We estimate Q2 clean EBIT of SEK 111m

Pulp price down 20-30%, still very high pulp inventories

EV/CE of 1.13x and ‘19e ATRoCE of 16%

We estimate Q2’19 EBIT of SEK 111m
We estimate Q2’19 clean EBIT of SEK 111m, down from SEK 127m in Q1’19. The biggest effects q-o-q will likely be SEK -38m due to lower realised pulp prices, SEK 10m from higher volumes and SEK 5m from FX. We lower our 2019 EBIT estimate as the pulp price has dropped at a slightly faster rate than we had anticipated, but keep our 2020 and 2021 estimates unchanged as we had already expected the pulp price to remain low during these years. The Q2 report is due 25 July.

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 ~20% to USD 1,000/t, while Chinese prices are down ~30%, which means there could be further downside for European prices. Zero demand growth in ’18 vs. ~3% p.a. historically, has resulted in record-high inventories. The positive is that supply growth will be very low in ’19e and ’20e, at only ~0.5% p.a. The 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, into higher capacity, improved efficiency and a new packaging business. 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 12% below peers on an average of ’18, ’19 and ’20 multiples. EV/CE of 1.13x is above its historical average of 0.7x, but ‘19e ATRoCE of 16% is also significantly above the historical average of 7%.

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ABG Sundal Collier - Introduce.se