Research detailed document (PDF) can be found here (in Spanish): Valoración Iberpapel (Dic 2018)
With 339 million euros market cap, Iberpapel (IBG) is a Spanish industrial company that operates in the pulp and paper industry through its integrated operating process, consisting of the forestry division, the industrial division and the commercial one. The forestry division allows the company to extract and produce the raw material, timber, from its 25,778 hectares of eucalyptus, located in Uruguay, Argentina and Spain. This raw material is transported to the industrial plant in the north of Spain, which is formed of the cellulose plant, the paper mill and the energy section, that allows the company to produce the energy that is required in the process plus a surplus that is sold to the market. Finally, through the commercial network, Iberpapel sells its paper products, mainly printing and writing products, to the market. The group is one of the main players in the south of Europe, although it has branches in all Europe and the north of Africa. 60% of its revenue comes from Spain, while 34% corresponds to the rest of Europe. Everything else comes from Africa and South America, where Iberpapel sells some raw timber.
As of now, the industrial division can produce up to 200,000 tonnes per year of cellulose and up to 250,000 tonnes of paper. However, Iberpapel is implementing the Hernani Project (HP from now onwards), which will require an investment of 180 million euros and will allow the company to produce 85,000 extra tonnes of paper and 30,000 tonnes of pulp. On top of that, the company will enter the flexible packaging segment thanks to the new machines, which has better growth potential than printing and writing paper.
The group has a healthy financial position, with more than 80 million euros in net cash, which represents close to 25% of market cap. The business generates around 30 million in operating cash flows and has a low maintenance capex of around 3 million. Therefore, there is no financial risk in implementing the HP as the company, on top of generating a lot of free cash flow, has the ability to incur in some debt without increasing the risk.
Iberpapel generates 221 million euros in revenues, with a nil growth since 2012. Operating revenue, however, has grown 5% annualized since 2012, and 30% since 2014 thanks to the expansion of margins. As of 2017, the operating margin is 12% while FCF margin is 15%, generating 33 million in free cash flow.
The industry is a mature and segmented one, with more than 500 groups only in Europe and a 0.2% annualized growth since 2000. The size of the European market is 80.000. Within the industry, however, we can identify two segments: pulp and paper. The paper capacity has decreased and 8% since 2005, with a total capacity of 101 billion tonnes. Production has remained constant around 90% of capacity. Most of the paper production in Europe corresponds to packaging papers (47 billion tonnes), followed by graphic papers (33 billion). With the HP, Iberpapel will enter the packaging papers industry, which grew at 4% in 2017 (demand grew at 3.7%), reducing the exposure to graphic papers, which grew at -2.3% (demand fell by 5%).
Considering the low growth rate of the industry, the implementation of the Hernani Project and the competitive advantage arising from the vertical integration of the group the company could be worth 42 euro per share in 5 years in a conservative scenario. If we assume that the competitive advantage remains as strong as in 2017 (return on capital: 14.5%) value per share could be 52 euro. In the conservative scenario annualized return could be 6%, while in the optimist one it could be 10%. These valuations have been obtained applying historical multiples (EV/EBITDA: 5.8x; EV/EBIT: 9.1x; EV/FCF: 11.9x) which can be deemed as conservative (in 2023 Iberpapel will have a better product mix with lower risk and higher growth rate expectations than today´s mix).
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