Earnings multiple

2023 annual revenue and earnings have been good in challenging market conditions. Management has acted pro-active to manage price levels and volumes. With a gross margin above 50% the company demonstrates pricing power.

In 2023 the stock delivered a multiple expansion from 4x PE (Q1'23) to 7x PE after the Q4'23 earnings. Valuation is 10x PE when extrapolating 1kr from Q4'23. The relative high multiple could justify a correction towards 35kr.

Dividend

Nordic Paper lowered its dividend over 2023 to 4kr (4.65kr). At the moment the dividend yield of 9% offers a solid annual return at 60% payout. The lowered dividend indicates that the high payout is not sustainable when earnings decline.

Trends

Nordic Paper benefits from the long-term ESG trend with replacement of plastic products and the environmental and sustainable requirements towards supplier. The company is well-positioned in the target market(s) for paper products; especially with the safety regulations in the food sector the company has moat (reflected in its gross margin and ROE).

Bäckhammer project

Investments of 850Mkr are expected to add 100Mkr to annual EBITDA. The project is expected to increase production, improve sustainability and competitiveness.

Kraft paper

Kraft paper is produced in Sweden from own production of pulp that is based on locally produced raw material (Bäckhammer). The paper is used for packaging in different industries from food to industrial. The EBITDA margin is 18% for the segment. Both volumes and prices decreased in 2023, but the order intake is developing positive in 2024.

Natural greaseproof

The paper is mainly used in contact with food, and some other areas (electronics). The paper is produced in Sweden, Norway and Canada. This EBITDA margin is also 18%.

Dry forming

Dry forming is a new technology to produce 3D products from cellulose. This can be a replacement for plastic products. The technology is under development and could be a potential future catalyst.

Chinese holding

Sutriv Holding AB owns 48% of Nordic Paper and has a significant influence over the company. This major shareholder sold shares with the IPO in 2020.

Financial strength

Since the purchase of the Canadian company end 2021 the company has reduced net debt by 50%. With recent strong results Net Debt/EBITDA is now below 1.0.

Paper pulp prices

The company expects that pulp prices will increase in 2024. Since 2023 Russian wood suppliers are sanctioned which reduces availability and has an increasing effect on prices.

Increased inventory

Management actively reduces sales volumes to protect price levels. However in the past 18 months the companies inventory increased.

Goodwill impairment

Goodwill from the purchase of the Canadian company may result in an impairment when market conditions deteriorate with the annual revaluation on DCF. This would significantly impact earnings when already pressured with most likely a major impact on the share price. On the other hand this would reduce cash-out on taxes and dividends.