BofA update shows where active managers are putting money
Investing.com -- Berenberg initiated coverage on the European forestry, pulp and paper sector, pointing to structural challenges tied to China’s growing self-sufficiency and aggressive capacity expansion.
The bank began with a Buy rating on Svenska Cellulosa (SCA), a Hold on Stora Enso, and a Sell on UPM. Berenberg drew a parallel between the current trends and the wider chemicals sector’s struggles over the past decade, noting that large Chinese investments have left both industries facing structural oversupply.
The broker said “Red ink on white paper” reflects its view that current earnings weakness is structural, driven by China’s investments in pulp and paper mills that reduce reliance on imported pulp and push the country toward net-exporter status.
Market pulp prices are expected to stay anchored around $500 per tonne, below historical averages, pressuring profitability for producers like UPM, where pulp accounts for nearly half of group EBITDA. Prices may become less volatile, as Chinese mills now have greater supply flexibility, Berenberg added.
Forest ownership emerged as a key differentiator. SCA, Europe’s largest private forest owner, is seen as best positioned with 60% wood self-sufficiency, ensuring higher and more stable margins.
By contrast, Stora Enso’s plan to demerge its Swedish forest assets could provide balance sheet relief but also weakens integration, exposing the company more heavily to packaging markets.
Berenberg also cautioned that the transaction risks triggering deferred tax liabilities linked to the historical appreciation of those assets.
“Stora Enso’s decision to initiate a strategic review of its meaningful Swedish forest assets can effectively unlock share price upside, in our view,” Berenberg analysts said in a note.
Packaging, once touted as a structural growth segment, is now judged oversupplied. Overinvestment in consumer board following COVID-19, combined with China’s emergence as a competitive exporter of ivory board, clouds the outlook for European players.
Stora Enso , which has invested heavily in folding boxboard, is seen at risk of price competition. The upcoming EU Packaging and Packaging Waste Regulation (PPWR) may support substitution away from plastics but also seeks to reduce overall packaging use, leaving the net effect neutral.
On UPM, Berenberg warned of prolonged downside from its heavy pulp exposure and growing Chinese competition in graphic papers, rating the stock Sell with a €21 target.
SCA, backed by valuable forest assets and cash-generative profile, was rated Buy with a SEK150 target, while Stora Enso received a Hold with a €10.40 target.