On Thursday, Jefferies upgraded UPM-Kymmene OYJ (UPM:FH) (OTC: UPMKY) stock, shifting the rating from Hold to Buy. The new price target set for the company is EUR31.25.
The upgrade reflects a shift in the market sentiment regarding pulp and packaging stocks, which the analyst believes is now favorable for investors with a longer-term perspective.
According to the analyst, the negative stance on pulp stocks and positive outlook on packaging has been a consensus since June 24, 2024. However, with the significant correction in China hardwood pulp prices by over 25% since June and the adjustment of earnings expectations for 2025 due to sector profit warnings, the analyst sees an opportunity for reallocation to pulp stocks.
UPM-Kymmene's year-to-date performance shows a 26% decline, contrasting with the Stoxx 600 index's 5% gain, suggesting potential for reallocation.
The analyst highlights that the downside for UPM-Kymmene appears more limited now, with the added benefit of yield support while waiting for a recovery in pulp prices and EBIT between 2026 and 2028. The firm no longer holds a negative view on the pulp sector, anticipating a bottoming out in the first quarter of 2025.
Despite uncertainties such as US trade tariffs on China affecting pulp demand, the analyst suggests that stimulus measures may partially counteract this, and pulp cost curve support is estimated to be around 5-10% below current prices.
Supply dynamics also play a role in the upgraded outlook. The market has witnessed supply reductions due to closures, leading pulp producers taking economic downtime, and a shift to other grades of pulp, which are expected to support prices. The analysis foresees a healthy pulp market from 2026 to 2028 due to limited new supply.
For UPM-Kymmene, a 10% increase in pulp prices in 2025-2026 could translate to approximately a 15% boost in EBIT, positioning the company as a primary beneficiary of the anticipated pulp inflection.
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