Biomass Platform And Special Pulp Shift Will Transform Long Term Earnings Profile

Catalysts

About ENCE Energía y Celulosa

ENCE Energía y Celulosa operates a Special Pulp Centered business and a local biomass based renewable energy platform focused on electricity, industrial heating, biomethane and renewable fuels.

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

• The shift in the pulp division towards higher margin special products, including ENCE Advanced grades that substitute more expensive softwood based alternatives, is intended to lift the average margin per tonne and support EBITDA expansion over time, with mix upgrade already linked to incremental pulp EBITDA targets by 2028.
• The ramp up of the first 125,000 tonne fluff line, where ENCE is positioned as the only European producer with cheaper hardwood sourcing and a quoted structural extra margin of roughly €60 per tonne versus standard BHKP, is set to increase the share of premium products and support higher revenue density per tonne and earnings.
• The 24 month Efficiency & Competitiveness plan, built on process reengineering and AI enabled initiatives plus a streamlining of operations, targets around €22 per tonne of cash cost savings and an estimated net present value of €200m, which directly supports pulp EBITDA margins and cash generation once executed.
• The biomass based renewable energy platform, with tangible pipelines in biomethane and renewable industrial heating and management guidance to more than triple recurring EBITDA by 2030, is designed to add a growing, diversified earnings stream that is less tied to pulp pricing and can improve group level EBITDA resilience.
• The 38 project biomethane pipeline, including 18 projects at a late permitting phase and a stated target of over 1 terawatt hour and around €60m incremental EBITDA by 2030, together with the plan to reach 2 terawatt hour and about €40m incremental EBITDA in renewable industrial heating, points to potential growth in recurring revenue and a rising share of higher visibility, contracted earnings.

Assumptions

This narrative explores a more optimistic perspective on ENCE Energía y Celulosa 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 ENCE Energía y Celulosa's revenue will remain fairly flat over the next 3 years.
• The bullish analysts are not forecasting that ENCE Energía y Celulosa will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate ENCE Energía y Celulosa's profit margin will increase from -4.0% to the average GB Forestry industry of 5.2% in 3 years.
• If ENCE Energía y Celulosa's profit margin were to converge on the industry average, you could expect earnings to reach €41.7 million (and earnings per share of €0.15) by about January 2029, up from €-31.2 million today.
• 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 39.8x on those 2029 earnings, up from -18.3x today. This future PE is greater than the current PE for the GB Forestry industry at 14.6x.
• The bullish analysts expect the number of shares outstanding to grow by 3.71% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.86%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A prolonged period of depressed BHKP pricing similar to the third quarter, when group revenues fell by €11 million quarter on quarter and the pulp business saw a €15 million revenue impact, could keep the company reliant on discounts and spot volumes, which would pressure revenue and EBITDA.
• The pulp division currently generates limited profitability, with pulp EBITDA at €4 million in the third quarter and a group net loss of €15 million. Any delay in cash cost reductions or weaker than planned benefits from process reengineering and AI projects would weigh directly on net margins and earnings.
• The efficiency and competitiveness plan depends on difficult labor negotiations at heavily unionized mills in Navia and Pontevedra and on executing automation projects over 24 months. Setbacks or smaller than targeted savings versus the planned €22 per tonne could reduce the expected improvement in cash costs and free cash flow.
• The biomass backed renewable energy platform still has several business verticals in ramp up, with roughly €1 million EBITDA losses offsetting gains in biomass to electricity in the third quarter. Slower scale up of biomethane and renewable industrial heating projects or permitting delays in the 38 project biomethane pipeline could limit growth in recurring EBITDA and group earnings.
• The plan to increase higher margin special pulp and fluff volumes, including a target for special products to reach 62% of sales by 2028, relies on continued customer adoption and successful product homologation. Weaker than expected demand for these premium products or sustained heavy discounting in standard BHKP could cap the uplift in average selling prices and keep operating margins under pressure.

Valuation

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

• The assumed bullish price target for ENCE Energía y Celulosa is €4.0, which represents up to two standard deviations above the consensus price target of €3.43. This valuation is based on what can be assumed as the expectations of ENCE Energía y Celulosa'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 €4.0, and the most bearish reporting a price target of just €2.7.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be €795.0 million, earnings will come to €41.7 million, and it would be trading on a PE ratio of 39.8x, assuming you use a discount rate of 13.9%.
  
• Given the current share price of €2.35, the analyst price target of €4.0 is 41.2% 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.