Biorefinery Launch And Uruguay Optimization Will Boost Future Earnings Amid CO₂-Free Energy Demand

Key Takeaways

• Optimization in Uruguay and leveraging advanced materials could boost UPM's profitability and revenue growth amid rising demand for CO2-free energy.
  
• Strategic exploration for inorganic growth and biorefinery production commencement are positioned to expand revenue and earnings despite challenging paper market dynamics.
  
• Persistent challenges in Europe and global markets pressure UPM's profitability, with high wood costs and demand slowdowns impacting revenue stability and earnings growth.

Catalysts

Engages in the forest-based bioindustry in Europe, North America, Asia, and internationally.

• UPM's focus on cost reduction through optimization of its operations in Uruguay, including full utilization of the railway connection and potential production expansion, could improve net margins and profitability.
  
• The company's advanced materials and decarbonization solutions businesses are poised for sustained growth, exceeding GDP growth, which could drive future revenue growth as demand for CO2-free energy increases.
  
• UPM's strategic initiative to explore value-accretive opportunities for inorganic growth, especially in faster-growing geographies, presents a potential catalyst for revenue expansion and portfolio diversification.
  
• The commencement of production at the Leuna biorefinery is expected by the end of 2024, with full production and positive EBIT projected by 2027, which could enhance overall earnings as the biochemical business ramps up.
  
• The graphic papers business, despite facing stable-to-slightly declining market demand, continues to generate strong cash flows, which can support future earnings and fund growth initiatives.

UPM-Kymmene Oyj Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming UPM-Kymmene Oyj's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.8% today to 13.3% in 3 years time.
• Analysts expect earnings to reach €1.5 billion (and earnings per share of €2.85) by about December 2027, up from €695.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €1.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.6x on those 2027 earnings, down from 20.7x today. This future PE is lower than the current PE for the GB Forestry industry at 26.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.46%, as per the Simply Wall St company report.

UPM-Kymmene Oyj Future Earnings Per Share Growth

Risks

• The decrease in sales and realized lower-than-expected volumes, despite improvements in operating costs, suggest challenges in maintaining revenue growth, impacting overall earnings.
  
• The significant market demand slowdown in Europe, particularly for UPM's consumer-driven businesses, creates revenue uncertainty that could pressure net profit margins if consumer spending remains cautious.
  
• The persistent high wood costs in Finland present structural challenges that could squeeze profit margins, particularly if pulp prices do not improve to offset these costs.
  
• The slow recovery in global pulp markets, especially in Asia, indicates vulnerability to market fluctuations, potentially impacting revenue stability and net earnings.
  
• The delays and uncertainty in implementing cost-saving measures or structural adjustments, such as capacity reductions or organizational restructuring, might hinder timely improvements in profitability and earnings growth.

Valuation

• The analysts have a consensus price target of €32.56 for UPM-Kymmene Oyj based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €43.5, and the most bearish reporting a price target of just €27.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €11.4 billion, earnings will come to €1.5 billion, and it would be trading on a PE ratio of 14.6x, assuming you use a discount rate of 8.5%.
• Given the current share price of €26.94, the analyst's price target of €32.56 is 17.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.