Sector update 2010 Q3 12 November 2010 Analyst: Einar Kilde Evensen +47 2294 8232 [email protected]Company Top pick Trigger / comment Holmen (SWE) Norske Skog (NOR) Who dares? High debt, low margins and high exposure to newsprint. Share is not very cheap either. SCA (SWE) Can gain materially if pulp price falls back, but is otherwise a stable (and good) 4-5% dividend yield case b b Well-diversified, but share is expensive. Start-up of sawmill in 4Q could see teething problems. TP upgraded; 2010-11 EBITDA up ~50% after blow-out 3Q TP upgraded. Strong FCF, decent share price. Will benefit from EUR weakness. Strong balance sheet. Stora Enso (FIN) UPM (FIN) Our coverage universe Mcap Price Target Poten- EV/EBITDA ratio Ticker Curr. Rec. (EURm) (curr.) (curr.) tial 2010e 2011e 2012e HOLMB SS SEK SELL 1,935 213.90 190.00 -11 % 9.5x 8.1x 6.5x NSG NO NOK SELL 269 11.45 6.00 -48 % 8.6x 5.9x 4.1x SCA B SS SEK HOLD 7,836 103.20 110.00 7 % 7.5x 6.3x 6.1x STERV FH EUR BUY 5,812 7.37 9.00 22 % 6.6x 5.6x 5.3x UPM1V FH EUR BUY 6,364 12.24 15.00 23 % 7.4x 6.1x 5.5x
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Holmen recommendation reduced to Sell (PT unchanged at SEK 190)NSG reiterated at Sell, NOK 6.00SCA reiterated at Hold, SEK 110.00Stora Enso reiterated at Buy, with PT up to EUR 9.00 from EUR 7.00UPM reiterated at Buy, with PT up to EUR 15.00 from EUR 13.00
Our assessment 1: Newsprint "bull story" of rising 2011 prices is over. It's all over.The market already expects and has to a large extent discounted NP price increases in Europe next year of 10%-15%.European newsprint demand is in structural decline, implying deteriorating market conditions for 2012 and forwardInvestors should avoid NSG and also Holmen who have the highest exposure to European newsprint (Holmen is also positively exposed to packaging).
Investment conclusion Pair trades recommendedShort Holmen: Trading near historically high multiples. Startup of new SEK 1.1bn Braviken sawmill in 4Q may have teething problemsShort NSG (if possible): Bullish story on 2011 NP prices is discounted.Long Stora Enso: Lowest EV/EBITDA multiple, best exposure (packaging)Long UPM: Lowest EV/EBITDA multiple, strong balance sheet
2: Packaging is the place to beMarket is growing, but with stable prices. If the general economy and consumer spending remain fair, packaging should be an attractive growth market.
3
Sector update12 November 2010
PULP AND PAPER SECTOR
3Q roundup: Publication paper disappointed; Pulp and packaging better
Stora EnsoNewsprint and Book Paper 323 -0 % -0 % 0 n.m. n.m. On parMagazine Paper 541 3 % -1 % 46 79 % 69 % BetterFine Paper 563 7 % 5 % 71 38 % 16 % BetterConsumer Board 594 -2 % 3 % 78 -4 % 21 % On parIndustrial Packaging 225 -12 % -9 % 19 158 % 25 % BetterUPMEnergy 124 4 % 3 % 44 12 % 17 % BetterPulp 489 10 % 8 % 199 38 % 24 % BetterForest and Timber 387 5 % 7 % 68 107 % 331 % BetterPaper 1,672 7 % 2 % -64 -195 % -228 % WorseLabel 284 3 % 3 % 24 13 % 17 % BetterBetter 2 of 8 3 of 4 2 of 4 2 of 2 3 of 4 2 of 2On par 3 of 8 1 of 4 - - - - Worse 3 of 8 - 2 of 4 - 1 of 4 -
* Note: ' 'On par'' if reported within +/- 5 % range of estimates
Wood & forest Energy
Publ. paper
Board & pack.
Other paper Pulp
Apart from SCA'sdisappointments in Personal Care and Tissue, the main disappointments came within Publication paper
0
1
2
3
4
5
6
7
8
9
Publ.paper
Board &pack.
Otherpaper
Pulp Wood &forest
Worse
On par
Better
4
Sector update12 November 2010
PULP AND PAPER SECTOR
Agenda
Case: Newsprint
Other key considerations
Valuation
3Q updates and changes of estimates
Appendix
5
Sector update12 November 2010
PULP AND PAPER SECTOR
The subject of this update
The end of newsprint (as we know it)?Newsprint is continuously losing advertising market share
Newsprint's key strengths"Coffee table effect". Multiple readers per paperMedia choice #1 for baby boomersPurchaser "owns" newspaperLocalPortability
Newsprint's key weaknessesDistributionHeavily dependent upon advertising from real estate, employment and autosDeclining circulation and subscription
6
Sector update12 November 2010
PULP AND PAPER SECTOR
Can you pick the choice of the future?
This? Or this?
7
Sector update12 November 2010
PULP AND PAPER SECTOR
An analogy to newspaper as media habits change: Blockbuster Inc.
Blockbuster Inc. factsFirst store opened in Dallas, TX, 1985IPO in 1999, for USD 560m5,000 stores in US (Jan 2010)
PeaksShare price: April 2002, at USD 30 (Market cap: USD 5,300m)Yearly revenues: 2004, at USD 6,053mEBIT margin: 2003, at 8%NIBD: 2005, at USD 882m
BUST
8
Sector update12 November 2010
PULP AND PAPER SECTOR
Blockbuster is now bust (no pun intended)
Blockbuster Inc filed for Chapter 11 in September 2010
We believe newsprint is a structural sunset industry, just like video rental (with physical stores), and LPs, music
cassettes and CDs.
There will be niche markets, but market demand is going to continue falling.
9
Sector update12 November 2010
PULP AND PAPER SECTOR
What's going on with New York Times?
Arthur Sulzberger Jr, CoB of NYT Co.
We will stop printing the
New York Times some time in the future.
(Sept 2010)
Our print product is alive
and well(Sept 2010)
Janet Robinson, CEO of NYT
New York Times factsPublished since 1851Has won 104 Pulitzer prizes, more than any other mediaCurrent circulation: 950', down >10% from peakFirst major newspaper to launch iPod/iPhone application in 2008 Third largest newspaper in US after WSJ and USA Today
Question: Will this newspaper bellwether also be the first to stop printing on paper?
Maturities: Holmen and SCA have the most solid balances; Stora Ensoand UPM the longest maturities
x
!b
Best:
• Holmen, Stora Enso
Worst:
• Norske Skog – critical for 2012
x
18
Sector update12 November 2010
PULP AND PAPER SECTOR
Pulp price seems to have peaked, at 66% over the trough in April 2009
Lower pulp price will help Norske Skog through lower costs on magazine paper production (not newsprint).
NBSK Europe is down 2% from the peak in July 2010, which was 7% above the previous peak in June 2008
Pulp markets remain tight due to the absence of shipments from Chile and Indonesia as well as the gradual improvement in paper demand and production in Europe
Stora Enso and UPM are net producers of pulp, while the rest are net buyers, SCA being the largest
0
200
400
600
800
1,000
1,200
03.1
2.19
96
03.1
2.19
97
03.1
2.19
98
03.1
2.19
99
03.1
2.20
00
03.1
2.20
01
03.1
2.20
02
03.1
2.20
03
03.1
2.20
04
03.1
2.20
05
03.1
2.20
06
03.1
2.20
07
03.1
2.20
08
03.1
2.20
09
USD
/ to
nne
-
10
20
30
40
50
60
days
Inventories (right)
NBSK US
NBSK Europe
19
Sector update12 November 2010
PULP AND PAPER SECTOR
NP prices are higher in US than in Europe by a margin of 7%
It costs EUR 40-50/tonne to ship newsprint across the Atlantic
Jan-Apr 2010 European shipments are up 4% YoY
Announced NP closures in Europe for 2010 amount to 295kt or ~2.3% of total capacity (~13mt), while demand is up 4.1% YoY first nine months.
Lower recovered paper prices (ONP/OMG) will help P&Ls (9% of NSG'scosts are RP!)
European shipments YTD
-800
-600
-400
-200
0
200
400
600
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
2006 2007 2008 2009 2010 2011
'000
tonn
es (y
early
cap
acity
)
Volga JSCUPMStora EnsoSolikamsky Pulp & Paper JSCSCAPerlen PapierPapierfabrik PalmPapeteries de TurckheimOsnovaNorske Skog IndustriesMatussière & ForestInvestlesprom GroupHolmenFabryka Papieru MyszkówBurgo GroupBelarus GovernmentAbitibiBowater
Category Graphic Grade NEWS Region Europe
Sum_Change
Year Q
Parent
European capacity closures 2006-2010
200
300
400
500
600
700
800
06-2
001
12-2
001
06-2
002
12-2
002
06-2
003
12-2
003
06-2
004
12-2
004
06-2
005
12-2
005
06-2
006
12-2
006
06-2
007
12-2
007
06-2
008
12-2
008
06-2
009
12-2
009
06-2
010
EUR
/ to
nne
300
350
400
450
500
550
600
650
700
750
800
USD
/ to
nne
NP Europe (EUR)
NP N.Am (EUR)
NP N.Am (USD)
Diff: EUR 31 / ton (7%)
-8,000
-4,000
0
4,000
8,000
12,000
jmmjsnjmmjsnjmmjsnjmmjsnjmmjsnjmmjsnjmmjsnjmmjs
2003 2004 2005 2006 2007 2008 20092010
'000
tonn
es
-20 %
-10 %
0 %
10 %
20 %
30 %
grow
th
YTD ShipmentsAcc. YoY Growth
20
Sector update12 November 2010
PULP AND PAPER SECTOR
-300
-200
-100
0
100
200
300
400
500
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
2006 2007 2008 2009 2010
'000
tonn
es (y
early
cap
acity
)
VertarisUPMStora EnsoSaber PaperPapierfabrik GolzernPapierfabrik am NeckarPapeteries des Deux-GuiersPapeteries des AlpesNorske Skog IndustriesMyllykoskiMatussière & ForestJIP-PapirnyHolmenCartiere Paolo PignaBurgo GroupArctic Paper
Category Graphic Grade UM Region Europe
Sum_Change
Year Q
Parent
-800
-700
-600
-500
-400
-300
-200
-100
0
100
200
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
2006 2007 2008 2009 2010
'000
tonn
es (y
early
cap
acity
) UPMStora EnsoSappi LimitedPerlen PapierPapierfabrik am NeckarMyllykoskiMatussière & ForestKübler & NiethammerInvestlesprom GroupHolmenBurgo Group
Category Graphic Grade CM Region Europe
Sum_Change
Year Q
Parent
Magazine paper: Picking up … slowly
Jan-Sept 2010 shipments
• SC: +2.0% YoY
• CM: +8.7% YoY
• CWF: +12.1% YoY
Announced 2010 capacity growth:
• UM: -1.2% of cap.
• CM: +0.3% of cap.
• CWF: none
Largest exposures:
• UM: Holmen, NSG
• CM: NSG, UPM
• CWF: STERV, UPM
European UM capacity closures 2006-2010 European CM capacity closures 2006-2010
400
500
600
700
800
900
1,000
06-2
001
11-2
001
04-2
002
09-2
002
02-2
003
07-2
003
12-2
003
05-2
004
10-2
004
03-2
005
08-2
005
01-2
006
06-2
006
11-2
006
04-2
007
09-2
007
02-2
008
07-2
008
12-2
008
05-2
009
10-2
009
03-2
010
08-2
010
EUR
/ to
nne
CWF (heavy, coated mag. paper)
LWC (lightweight coated mag. paper)
21
Sector update12 November 2010
PULP AND PAPER SECTOR
Packaging prices – peaking out already??
Largest exposures:
• Liner: SCA
• Fluting: only minor
• FBB: STERV, Holmen
0
100
200
300
400
500
600
700
13.0
1.20
04
13.0
6.20
04
13.1
1.20
04
13.0
4.20
05
13.0
9.20
05
13.0
2.20
06
13.0
7.20
06
13.1
2.20
06
13.0
5.20
07
13.1
0.20
07
13.0
3.20
08
13.0
8.20
08
13.0
1.20
09
13.0
6.20
09
13.1
1.20
09
13.0
4.20
10
13.0
9.20
10
EU
R /
tonn
e
Testliner P
Kraftliner
RB fluting
22
Sector update12 November 2010
PULP AND PAPER SECTOR
Agenda
Case: Newsprint
Other key considerations
Valuation
3Q updates and changes of estimates
Appendix
23
Sector update12 November 2010
PULP AND PAPER SECTOR
STERV and UPM have the lowest EV/EBITDAs in the group*, and are also the cheapest vs own history
Holmen vs rebased peers from jan 1999Rebased to price per 15.01.1999
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