Digital Shifts And Chinese Expansion Will Hurt Pulp Margins

Key Takeaways

• Digitalization, new bio-based materials, and global overcapacity threaten Altri's traditional pulp market share, intensifying margin and revenue pressure.
  
• Increasing environmental regulation and regional concentration expose Altri to higher costs, economic volatility, and reduced operational flexibility.
  
• Strong execution on diversification, favorable market dynamics, and ESG leadership position the company for resilient margins, premium valuation, and sustainable long-term growth.

Catalysts

Produces and sells cellulosic fibers in Portugal and internationally.

• Ongoing digitalization and declining paper consumption are set to structurally reduce demand for pulp and paper products, directly threatening Altri's core revenue base over the long term.
  
• The rapid rise of new, disruptive alternative bio-based materials-such as bamboo and agricultural waste pulp-poses a growing competitive threat by eroding traditional wood pulp market share, leading to revenue stagnation and margin pressure for Altri.
  
• Increasingly strict and evolving environmental regulations across Europe and other major markets will drive up both capital expenditure and operating costs, compressing net margins and reducing returns on invested capital as Altri attempts to maintain compliance.
  
• Heavier reliance on the European market exposes Altri to concentrated region-specific economic risks and regulatory shifts, which can generate greater volatility in revenues and threaten earnings stability in future downturns.
  
• Large, vertically integrated pulp producers accelerating capacity expansion in China are expected to intensify global competition, putting further downward pressure on pulp prices and diminishing Altri's pricing power, ultimately straining EBITDA and free cash flow over the coming years.

Altri SGPS Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Altri SGPS compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Altri SGPS's revenue will grow by 1.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 11.4% today to 13.7% in 3 years time.
• The bearish analysts expect earnings to reach €116.3 million (and earnings per share of €0.48) by about July 2028, up from €93.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.9x on those 2028 earnings, up from 10.9x today. This future PE is greater than the current PE for the GB Forestry industry at 8.6x.
• 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 11.32%, as per the Simply Wall St company report.

Altri SGPS Future Earnings Per Share Growth

Risks

• Strong execution and progress in Altri's long-term growth and diversification strategy, notably the full conversion of Biotek into dissolving pulp and the launch of a new acetic acid and furfural plant, positions the company to access higher-value product markets, enhancing future revenue and margin resilience.
  
• The rebound in global pulp demand, especially driven by robust growth in Asia and stable tissue demand, supports ongoing volume stability and could underpin higher top-line growth for Altri in coming years.
  
• Structural shortages of hardwood in the European market, where Altri has significant presence, ensure continued healthy price spreads over Chinese pulp prices and could underpin future profitability through higher relative selling prices and sustainable revenue streams.
  
• Altri's recognized ESG leadership, including top-tier ESG ratings and new sustainability-linked product initiatives, aligns with increasing investor and consumer preference for sustainable materials and could support a premium valuation multiple and lower cost of capital over the long term.
  
• The company's high returns on capital employed (ROCE) remain well above industry average, and ongoing operational improvements, such as the Celbi turbine upgrade and improved production efficiency at Biotek, are likely to support stronger net margins and growing free cash flow as short-term disruptions normalize.

Valuation

• The assumed bearish price target for Altri SGPS is €4.9, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Altri SGPS's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €7.1, and the most bearish reporting a price target of just €4.9.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €850.1 million, earnings will come to €116.3 million, and it would be trading on a PE ratio of 11.9x, assuming you use a discount rate of 11.3%.
  
• Given the current share price of €4.93, the bearish analyst price target of €4.9 is 0.6% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• 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.