After a long storm even the faintest flicker of light can be cause for optimism. Analysts think this is the case at Finnish forest products company Stora Enso STERV , where the secular decline in European publishing paper demand and low European construction demand have cast a shadow over the business during the last six years. The 9% surge in Stora shares after today’s first-quarter results were, largely driven by a relief that things weren’t getting any worse.
For example, though European paper demand continues to drift lower on a year-over-year basis, it is declining at a slower pace (about -4%) than in the fourth quarter (about -5.5%). Further, Stora estimates that recent industrywide paper capacity closures could boost industry newsprint and magazine capacity utilization rates from 90% to over 100% and from 77% to about 88%, respectively. If the pace of secular decline is indeed slowing and capacity utilization rates drift higher, Stora could see a boost to its paper profit margins, which have sagged in an era of overcapacity and weak demand.
Analysts do not think this will be the case, though, and expect declining European paper volumes to remain one step ahead of paper capacity closures in the medium term. Indeed, the company’s new EUR 200 million cost reduction plan does not include capacity reductions — a signal that capacity closures will not be enough to improve margins.
Stora has still not received approval from Chinese authorities to build plantation-based board and pulp mills in Guangxi; however, the company continues to shovel money into the region in anticipation of the approval. Given China’s concerns about pollution generated by the paper industry, we think there’s a risk the project does not gain full approval. At the very least, profitable production at the proposed Guangxi mills will not occur until 2016 versus original estimates of late 2014. There are a few authentic reasons for optimism in Stora’s results — including steady growth in Renewable Packaging and Biomaterials — but much of it was already baked into our outlook.
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