On Thursday Stora Enso has announced the acquisition of De Jong Packaging Group. The company is based in the Netherlands and is one of the largest corrugated box producers in the Benelux countries. The deal will add 1,200 million m2 of corrugated packaging capacity and will bring Stora Enso's Packaging Solutions division to a capacity of more than 2,000 million m2. 

Stora Enso has paid an enterprise value of EUR 1.02 bn (max earn-out of EUR 45 m by 2024), of which EUR 250 m are IFRS lease liabilities. De Jong is expected to reach revenues of EUR 1 bn and adj. Ebitda of EUR 114 m in 2022, which would correspond to an EV/adj. Ebitda multiple for 2022 of 8.9x. This means that the deal adds 9% to top-line and 5% to adj. Ebitda being slightly margin dilutive. Stora Enso expects that the acquisition will be EPS accretive from the beginning.

On top of that, Stora Enso said that an additional EUR 40 m in Ebitda will be added through expansion projects by 2025 and another EUR 30 m through annual synergies (sourcing, integration, optimization and commercial opportunities). Further synergies are possible if Stora Enso goes ahead with the currently studied conversion of the Langerbrugge paper production site in Belgium to containerboard.

The acquisition will be financed through existing liquidity and bilateral loan arrangements, which leads to an increase in Stora Enso’s net debt to operational EBITDA ratio from 0.4x to 1.4x. Closure of the deal is expected at the beginning of 2023. Menawhile, Stora Enso reiterated its full year 2022 operational EBIT guidance.

 

Valuation

Stora Enso currently trades at 11x P/E 23E, below its 5-year historical average of 13.4x and below the MSCI Nordic Materials Index (12.5x). On an EV/EBITDA basis, the stock is trading at 6.7x, below its 5-year average of 7.6x and below the MSCI Nordic Materials Index (7.5x).                                                                          

 

Conclusion

We believe that from a strategic perspective the acquisition makes sense, as De Jong Packaging Group's product portfolio and geographical presence (Netherlands, Belgium, Germany and UK) will complement and enhance Stora Enso's offering - as a producer of containerboard the Finnish company expands along the value chain. However, corrugated box converting is a low entry-barrier business, as it only cuts and glues containerboards and hence has lower operating margins. Furthermore, the deal will accelerate revenue growth and help to build market share within renewable packaging in Europe, where local presence is key. 

Main negative we can find in the acquisition is the price tag – at EV/Ebitda for 2022 of 8.9x Stora Enso has paid much more than well established company Smurfit Kappa, which trades at EV/Ebitda for 2022 of 5.2x.

Stora Enso remains our favorite pick in the forestry and wood segment. We view the increasing exposure to paperboard and wood products as well as the declining exposure to paper appealing. Furthermore, we find significant valuation potential from the commercialisation of the company’s bio-carbon (Lignode) innovation. Its large wood assets should additionally create a margin of safety given that record-high earnings are set to decline in 2023 due to lower selling prices and higher energy prices. However, Stora Enso is well positioned as it is able to generate 62% of the energy needed.

We reiterate our buy recommendation.

Management Outlook

Stora Enso has raised its guidance for 2022 Ebit in June and now expects it to be above 2021 Ebit (previously in-line). Consensus stands atat EUR 1.7 bn and hence already 14% above 2021 levels.

In the half year report released in July the company said the following:

The demand for renewable and eco-friendly products in the short and long-term remains strong and thus the environment for Stora Enso remains attractive. However, the company notes increased geopolitical and macroeconomic uncertainties as well as inflationary pressures and supply chain risks. To manage volatility, measures such as pricing, flexibility in sourcing and logistics, as well as hedging are in place.

• Consumer Board – continued strong demand for corrugated packaging in Europe expected to remain stable
• Pulp – strong demand in Europe and China to continue
• Containerboard – early indications of normalization
• Sawn Goods - early indications of normalization