- Q3 performance was strong but relative to Q2, most metrics were weaker: Revenue +37% y/y (-8% q/q); EBITDA +355% y/y (-44% q/q); EBITDA margin +977bps y/y (-898bps q/q) to 14.0%. Net debt/EBITDA improved to 0.4x (Q3 21A: 2.7x & Q2 22A: 0.5x).
- Cost of materials significantly increased q/q: This was driven by reduced CO2 compensation, significantly higher energy (electricity and gas), and higher raw material prices. Pulpwood prices and chemical prices increased further in the quarter. High energy prices and to some extent limitations in availability of recovered paper, necessitated some down time in the quarter.
- Publication Paper Europe (94% of EBITDA) generated a robust EBITDA margin of 15.5% despite various headwinds: Demand for standard newsprint in Europe decreased by 3% y/y as of August 2022; magazine paper demand decreased by 12%, with super calendared paper decreasing 10% and lightweight coated paper decreasing 14%. Capacity utilisation dropped q/q to 83% (Q2 22A: 90%), mainly driven by down time due to high energy prices; to some extent limited raw material availability and with Bruck PM3 stopping production in to facilitate testliner conversion. The waste-to-energy facility at Bruck has been operating since Q2 22A and is in its final phase of commissioning with Valmet to reach its full capacity utilisation. The facility significantly reduces the gas consumption and CO2 emissions for Bruck.
- Conversion to containerboard is progressing at Bruck and Golbey: The paper machine PM3 at Bruck ceased production of newsprint on 10 July. Bruck will enter the recycled containerboard market during Q1 23E enabling Norske Skog to become a leading European independent producer of recycled containerboard. The preparatory work and ordering of equipment for conversion to containerboard at Golbey is also underway, with production expected to start during Q4 23E. The machines are expected to operate at 60-70% utilisation in the first year and reach full utilisation during the third year of production. Once at full utilisation, the machines are expected to generate annual EBITDA of EUR 70-80mn (based on historical market prices and margins).
- Solid balance sheet and liquidity, despite containerboard conversions: Net debt/EBITDA now 0.4x. Remaining containerboard conversion CapEx of EUR 235mn (c.EUR 200mn of growth investments to date) vs. total available liquidity of EUR 460mn.
- European publication paper market balance remains tight: Executed and planned capacity closures in the industry have resulted in a tight publication paper market and the favourable market balance is expected to remain into 2023. Raw material and energy prices (EUR 99/MWH currently) are expected to remain high and volatile during the winter and will impact the publication paper prices in Europe. High energy prices and the lack of availability of raw materials may cause further production curtailments.
- Valuation undemanding: We estimate that Norske Skog is trading on a 1-yr rolled EV/EBITDA of 3.4x, with a total EV of EUR 658mn. We believe Norske Skog appears to be an attractive acquisition target.
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