Raflatac, Uruguay Operations And UK M&A Will Unlock Global Markets

Key Takeaways

• UPM's strategic expansion in advanced materials and biochemicals promises long-term growth through increased demand and new market entry.
  
• Operational efficiency and strategic closures aim to reduce costs and enhance margins in a challenging market environment.
  
• Rising raw material and wood costs, along with decreased demand, may squeeze profit margins and necessitate strategic adjustments across business segments.

Catalysts

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

• UPM's advanced materials business, particularly Raflatac, is capturing growth in labeling materials demand, which now exceeds pre-COVID levels, supported by efficiency measures. This recovery and ongoing improvements are likely to enhance revenue and margins.
  
• The company's new operations in Uruguay are fully operational, with initiatives in place to optimize and reduce cash costs, indicating potential for increased earnings and margin improvements as efficiency increases.
  
• UPM is actively pursuing competitive streamlining in Communication Papers, including a planned closure in Germany, which is expected to reduce fixed costs, helping to maintain margins in a declining market.
  
• The acquisition of Metamark in the U.K. and the focus on M&A for synergistic opportunities provide potential for revenue growth and improved margins through integration and expanded market presence.
  
• The strategic focus on biochemicals with a new biorefinery set to start commercial production, signals entry into a high-interest market with significant demand potential, promising long-term revenue and earnings growth.

UPM-Kymmene Oyj Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming UPM-Kymmene Oyj's revenue will grow by 3.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.9% today to 12.3% in 3 years time.
• Analysts expect earnings to reach €1.4 billion (and earnings per share of €2.67) by about May 2028, up from €301.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €1.6 billion in earnings, and the most bearish expecting €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 13.7x on those 2028 earnings, down from 40.9x today. This future PE is lower than the current PE for the GB Forestry industry at 30.2x.
• Analysts expect the number of shares outstanding to decline by 0.86% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.78%, as per the Simply Wall St company report.

UPM-Kymmene Oyj Future Earnings Per Share Growth

Risks

• The decrease in EBIT by 14% YoY in Q1 due to lower sales prices across all business areas and increasing raw material costs could suppress net margins and profitability.
  
• Communication Papers face a continuous demand decrease, leading to further capacity adjustments and streamlining, which could impact revenues and necessitate cost-cutting measures.
  
• Increased trade tensions and U.S. tariffs introduce uncertainty that could disrupt demand, trade flows, and consumer confidence, potentially affecting revenue and market stability.
  
• The muted high season in the energy sector due to mild winter temperatures and high hydro reservoirs has resulted in a 32% decline in market electricity prices, negatively impacting revenues and net margins in the decarbonization solutions segment.
  
• Higher wood costs, particularly in Finland, pose a risk to the fibrous business segment, potentially affecting production costs and squeezing profit margins.

Valuation

• The analysts have a consensus price target of €29.327 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 €36.0, and the most bearish reporting a price target of just €25.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €11.5 billion, earnings will come to €1.4 billion, and it would be trading on a PE ratio of 13.7x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of €23.32, the analyst price target of €29.33 is 20.5% 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.