Fibres South Ramp Up And Bioeconomy Expansion Will Drive Strong Long Term Upside

Catalysts

About UPM-Kymmene Oyj

UPM-Kymmene Oyj is a global forest industry and bioeconomy company producing pulp, paper, advanced materials, energy, biofuels and biochemicals.

What are the underlying business or industry changes driving this perspective?

• Ramp-up of the highly competitive Fibres South platform in Uruguay, combined with ongoing plantation maturation and logistics optimization that are expected to deliver around USD 25 to USD 30 per tonne cost reductions again by 2027, should significantly lift pulp segment margins and earnings across the cycle.
• Leuna biochemical refinery moving from commissioning to first commercial sales of industrial sugars and lignin-based products in late 2025, followed by glycol volumes in 2026 and a full, positive EBIT run-rate expected in 2027, positions UPM to capture premium specialty revenues and structurally higher group EBIT margins.
• Advanced Materials and Decarbonization Solutions segments, centered on labeling, specialty papers, renewable electricity and advanced biofuels, are benefiting from accelerating demand for low-carbon packaging and energy, supporting durable top line growth and progressively improving group EBIT mix.
• Capacity closures and fixed cost reductions in Communication Papers, alongside targeted debottlenecking and CapEx-light productivity projects across the portfolio, should materially lower structural cost per tonne and support higher net margins and cash conversion even in a subdued demand environment.
• Growing demand for CO2-free electricity and sustainable advanced biofuels, underpinned by electrification, data center expansion and tightening EU climate regulation, is expected to enhance price realization and utilization of UPM’s Energy and Biofuels assets, thereby supporting revenue growth and more resilient earnings.

Assumptions

This narrative explores a more optimistic perspective on UPM-Kymmene Oyj compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming UPM-Kymmene Oyj's revenue will grow by 4.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 1.2% today to 15.4% in 3 years time.
• The bullish analysts expect earnings to reach €1.8 billion (and earnings per share of €3.31) by about December 2028, up from €124.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €1.5 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 11.7x on those 2028 earnings, down from 101.1x today. This future PE is lower than the current PE for the GB Forestry industry at 62.3x.
• The bullish analysts expect the number of shares outstanding to decline by 1.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.79%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Prolonged weakness and volatility in global pulp markets, particularly if prices remain near current cycle lows rather than normalizing, would prevent Fibres South from delivering the anticipated step up in profitability and keep Fibres North close to break even or loss making, limiting group EBIT recovery and earnings growth.
• Structurally declining demand for communication papers in Europe and North America, even after current trade related disruptions subside, may more than offset capacity closures and fixed cost reductions. This could lead to chronically low utilization rates, weaker pricing power and sustained pressure on revenue and net margins in that segment.
• Persistently elevated or only slowly normalizing Nordic wood costs, combined with seasonal and structural constraints on wood availability, could keep the Finnish pulp and timber operations structurally higher on the cost curve. This would undermine the expected cost competitiveness improvements and constrain group EBIT and cash flow.
• Execution or ramp up risks in the Leuna biochemical refinery and broader biofuels operations, including delays in reaching full industrial scale, qualification of sustainable aviation fuel and market adoption of new biochemicals, could push out the timeline for positive EBIT contribution. This would reduce the uplift to group earnings and margins that underpins the optimistic valuation narrative.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for UPM-Kymmene Oyj is €32.0, which represents up to two standard deviations above the consensus price target of €25.79. This valuation is based on what can be assumed as the expectations of UPM-Kymmene Oyj's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €32.0, and the most bearish reporting a price target of just €21.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be €11.4 billion, earnings will come to €1.8 billion, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of €23.78, the analyst price target of €32.0 is 25.7% 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.