Sparebank: Norske Skog – Acquisition target, newsprint prices trending up and the share price could double in a normalised newsprint market

Below is a summary of research of Norske Skog. The company is reporting this Friday. We are very bullish on NSKOG due to its restructuring potential. We were right on our Circa Idea that doubled money. NSKOG owns 32% of Circa.

The green activities by NSKOG have a value equal to its market cap. I spoke to the management. They plan to focus on this story in their Q presentaion.

SpareBank research summary:

Conclusion

We keep our Buy recommendation and NOK50 target price ahead of Q1 2021 which will be reported on Friday 23 April. The key reasons why we recommend buying NKSOG is i) NSKOG is in our mind an acquisition target, ii) newsprint prices are increasing in Asia and we argue that this is will affect newsprint prices in Europe from 2H 2021 and iii) we estimate that the conversion from newsprint to container board is accretive for shareholders in NSKOG. The main concern for investors in NSKOG is in our mind lack of cash flow to cover capex and risk for capex overruns. We expect that cash flows will increase with a stronger market and argue that the risk profile for the conversion capex is not as high as investors interpret. With newsprint prices 15% below 2019 level and an EBITDA-margin around 10%, NSKOG’s market cap could increase with NOK4bn – which is more than the containerboard conversion capex -> attractive risk/reward, in our mind.

Our analysis

  • We would not be surprised if NKSOG is acquired by StoraEnso. Our take is that NSKOG fits well with StoraEnso as i) StoraEnso is currently evaluating a consumer board investment in Skoghall with an estimated capex of EUR800 to 850m, ii) StoraEnso expexts growth from building solutions and biomaterials (fit with NSKOG’s Circa, Cebina, bio-composites and FibreMatrix) and iii) a NSKOG acquisition would be a small ad-on for Stora Enso (NSKOG’s market cap is 2.5% of StoraEnso’s market cap). In addition, we estimate that OceanWood, which owns 42.85% of NSKOG has an IRR of 15% if it exits its investment at current market cap.
  • Newsprint prices expected up from 2H 2021 – prices have started to increase in Asia. Our take is that more than 20% of newsprint capacity will be taken out in 2020/2021 (based on announcements from UPM, Stora Enso and SCA). Our take is that this will have a positive effect on prices from 2H 2021. The effect of lower supply has in our mind had an effect on prices, especially in Asia, and according to our knowledge NKSOG is now exporting to exporting to Asia. Our assumption on higher prices as production is down is supported by statements from RISI the last months commenting in the price increases in Asia and this will most likely affect Europe from 2H 2021.
  • Accretive containerboard conversion we argue investors are too concerned about capex overruns and funding. Based on the margin competitors are reporting, we argue that the containerboard conversion is accretive for NSKOG. The capex for NKSOG is sizable compared to its size, but we that expect cash flow from operations and increased leverage will be sufficient to cover the capex from late 2021 to 1H 2023. The EUR350m containerboard conversion is a sizeable investment for NSKOG, but the capex should in our mind be split according to the risk for the different capex components. We have divided the capex into three risk categories and see low capex risk for increased storage capacity and water treatment (estimate EUR70m of capex) and medium risk for OCC* treatment (estimate EUR140m of capex) and higher risk for conversion capex (estimate EUR140m of capex).

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