On Tuesday, UBS updated its stance on UPM-Kymmene OYJ (UPM:FH) (OTC: UPMKY) stock, raising it from Neutral to Buy, while adjusting the price target to €34.00 from the previous €35.00. The revision reflects a more optimistic view of the company's prospects despite a near-term weakness in the pulp market.
UPM-Kymmene, a leader in the pulp and paper industry, has seen its share price fall below €30, which has prompted UBS to reconsider the stock's potential.
The firm acknowledges that while there have been concerns about pulp prices and energy challenges, UPM's main growth project has significantly progressed, reducing risks.
With capital expenditures expected to decrease and production volumes anticipated to increase in the second half of 2024, UBS predicts a strong growth in cash flow for UPM.
The analyst from UBS suggests that the current downturn in pulp prices is temporary and expects these prices to rebound, eventually settling at a premium relative to the cost curve after a period of oversupply.
Based on a mid-cycle benchmark price of $630 per ton for China BHKP pulp, UBS estimates free cash flow yields of 11-12% for UPM, with the potential for higher yields if pulp prices reach levels that would generate a 15% internal rate of return, approximately $700 per ton.
UPM-Kymmene's competitive edge is further strengthened by its pulp production capacity in Uruguay, which is among the lowest cost globally. The company is scheduled to hold its Capital Markets Day in the first week of September.
UBS anticipates that UPM's increasing cash flow could lead to the possibility of higher cash returns to shareholders in the near term, especially considering the absence of large new growth projects on the horizon.
In other recent news, UPM-Kymmene OYJ has seen an adjustment in its stock target from Jefferies, with a slight increase to EUR35.80 from EUR35.60, while maintaining a Hold rating. The firm projects a second-quarter EBIT of EUR235 million for UPM, a modest decrease from the consensus estimate of EUR254 million.
However, Jefferies anticipates a strong recovery for the company in the latter half of the year, forecasting an EBIT reaching approximately EUR1.59 billion for 2024, a figure that surpasses the consensus by around 9%.
UPM's robust financial position was underscored by Jefferies, pointing to a solid balance sheet and promising free cash flow projections from 2025 to 2028, subsequent to the peak capital expenditure phase. This financial strength is projected to bolster future capital returns to shareholders.
The firm also noted that the current high levels of European pulp prices could influence UPM's short-term performance, given the mixed views on China's market.
Despite the potential for a strong recovery later this year, the analyst advised caution over the current pulp price rally and the timing of market entry, suggesting a Hold position on the stock at the revised price target of EUR35.80. These are the recent developments concerning UPM-Kymmene OYJ.
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