A global nonwovens manufacturer
Suominen’s Q1 results remained weak. Earnings are to improve at some rate going forward, but valuation reflects expectations about meaningful gains towards next year.
We estimate H2 EBITDA to gain EUR 15m compared to H1
Suominen’s Q1 revenue grew 6% y/y to EUR 117m but missed our EUR 120m estimate. Growth was driven by higher prices in the wake of raw materials’, while FX also added EUR 3.4m. Both Americas and Europe were soft relative to our estimates. Volumes were flat while Finnish ports and the Mozzate plant saw strikes. The 4.2% gross margin didn’t meet our 7.0% estimate, in our view due to the top line miss but also because of slower-than-estimated margin rebound following the easing of raw materials costs. The comparable earnings metrics thus fell more than EUR 3m short of our estimates. Suominen retained its guidance, which wasn’t surprising since earnings are bound to increase by at least some amount from the low comparison period, but valuation increasingly places burden of proof on H2.
Our EBITDA estimate for the year is down 15% to EUR 33m
Suominen’s margins and volumes have been volatile in the past three years and so it’s hard to estimate where the gross margin will ultimately land now that the environment, at least in terms of raw materials prices, has began to normalize. The outlook on the balance between supply and demand is no more as favorable as it was. On the positive side Suominen’s new products’ share has continued to increase across the regions, which should support gross margin potential. In our view wiping end-market demand can be expected to remain stable, but there’s still the question of how rapid volume and margin gains the melting of US inventory levels may produce in H2. We believe Suominen’s fixed cost base, following the closure of the Mozzate plant, is adequate to support meaningful earnings recovery (above 10% gross margins) if higher volumes come through.
Valuation neutral assuming a return to historical margins
The 15x EV/EBIT multiple, on our updated FY ’23 estimates, isn’t cheap, whereas the 6x multiple for next year could already be described low. We find the valuation still rather neutral, assuming higher volumes and low double-digit gross margins (historical norm) begin to materialize going towards next year. Our updated TP is EUR 2.7 (3.0) as we retain our HOLD rating.
Suominen’s Q1 results saw top line grow 6% y/y, driven by higher raw materials prices, but revenue as well as profitability remained soft relative to our estimates. Suominen retains its guidance, expecting incremental improvement as H2 should be better.
Suominen reports Q1 results on May 4. We expect the company to have managed a modest improvement but focus rests on continued volume gains in the US business.
Some gains to be expected, but focus is on US volumes
Suominen’s Q4 results remained below our estimates as the US business still lacked volumes. Raw materials prices began to decline last year, but the relatively low volumes curbed earnings recovery. We believe earnings will begin to recover this year especially due to improving volumes and mix in the US, while raw materials prices should continue to stabilize. We expect these factors to drive earnings gains over the year, however we revise our Q1 EBITDA estimate to EUR 6.2m (prev. EUR 8.0m) as certain oil-based raw materials didn’t decline any longer in Q1 after their plunge in Q4. We leave our revenue estimate unchanged at EUR 120m and note Suominen may well achieve a double-digit growth rate as the comparison figure is very low.
We estimate double-digit growth for Americas this year
We estimate Suominen’s raw materials prices to have continued their slide in Q1 at a rate of a few percentage points q/q; the rate is somewhat slower than seen in Q4 as we estimate the prices to have fallen at an almost double-digit rate back then. We find there to have been some mixed developments lately as pulp prices have declined, at varying rates depending on the grade, while oil-based materials like polyester and polypropylene have remained rather flat after a steep drop in Q4. In our opinion such a stabilizing pricing environment is beneficial for Suominen, and hence focus rests more on product mix and volume gains. European revenue continued to grow last year, but we expect lower prices and traditional product exposure to pose a headwind there. Meanwhile Americas should reach a new top line high as US volumes return.
Valuation still appears neutral
In our view Suominen seems fully valued from a short-term perspective; we don’t consider the 10x EV/EBIT multiple, on our FY ’23 estimates, cheap. Meanwhile valuation doesn’t look too expensive against longer term potential, as the multiple amounts to 5x on our FY ’24 estimates when we expect gross and EBIT margins to have regained their respective historical levels of above 11% and 6%. We retain our EUR 3.0 TP and HOLD rating.
Suominen’s Q4 figures remained below estimates; volumes and margins will rebound this year, but valuation already reflects improvement amid uncertainty around the factors.
Improvement continues, but Q4 earnings remained very low
Suominen’s Q4 revenue landed at EUR 133m vs the EUR 140m/140m Evli/cons. estimates. Sales prices remained high, and the EUR 9m FX tailwind also helped, while Q4 volumes were flat q/q and y/y as US volumes continued to improve but not quite at the expected pace; raw materials deflation has led to some customer caution, in addition to which there have been manufacturing workforce shortages. The 5% gross margin, when adjusted for the EUR 4.8m hit in Italy, was a small improvement q/q but still clearly below our 10% estimate. Adj. EBITDA, at EUR 5.0m, came in below the EUR 11.8m/9.8m Evli/cons. estimates. FX lifted EBITDA by EUR 0.7m, while it lacked positive one-offs from the comparison period and was burdened by CEO change costs. Cash flow was strong as inventories and receivables declined q/q.
We estimate Americas revenue to grow by 13% in FY ‘23
Raw materials and energy prices continue to slide in Q1, which means Suominen’s pricing adjusts down in Q1 but slower than input costs. Meanwhile volumes and mix are improving; the US drives meaningful volume gains this year as especially H1’22 was challenging. Sustainable nonwovens’ growing share supports margins, but the relatively challenging European supply-demand balance in traditional products poses a headwind. We make some further small estimate cuts for this year; we estimate ca. 5% top line growth for the year, driven by double-digit growth in the US.
Focus rests on volumes over the coming quarters
H1’23 enjoys a favorable dynamic between falling input costs and relatively high (but already declining) nonwovens prices. The situation could extend to H2’23 if input costs continue to decline after the spring, but in our view margin gains are more likely to rely on improving volumes and mix after H1’23. FY ’23 results should thus demonstrate stabilizing profitability levels for Suominen after the rapid gains and declines seen in recent years. Suominen is valued below 5x EV/EBITDA and 9x EV/EBIT on our FY ’23 estimates, which we consider neutral levels since margins are likely to remain subdued especially during the early parts of the year. Our new TP is EUR 3.0 (3.5); we retain our HOLD rating.
Suominen’s Q4 results remained below estimates. Top line grew 15% y/y but was still soft relative to expectations, while cost inflation didn’t yet ease that much to translate into significantly better margins. Profitability hence stayed at a very modest level.
Suominen reports Q4 results on Feb 3. It’s clear Q4 will be a lot better than previous quarters, while FY ’23 profitability continues to improve. Many factors now support margins, but valuation also reflects better performance.
US volumes recover while raw materials prices decline
Suominen’s Q3’22 top line recovered a lot even when its early part remained difficult in the US. We expect the continued rebound to have helped Suominen grow 21% y/y to EUR 140m in Q4 revenue. We estimate Suominen’s raw materials prices to have declined by almost 10% q/q in Q4, which together with higher delivery volumes and relatively stable sales prices should have helped the company to a significant profitability improvement not only q/q but also y/y. We estimate Q4 EBITDA at EUR 11.8m. USD has lately weakened by some 10% against EUR but is still relatively strong compared to year ago. We therefore believe the US business to drive growth also this year.
European volumes seem unlikely to grow much this year
Suominen plans to close another of its plants in Italy. European demand for traditional wipes is soft, while Turkish and Chinese imports have added a lot of supply within such segments, and the Mozzate plant isn’t positioned to produce sustainable nonwovens. Italy’s position is also challenging in terms of energy costs. The closure would result in EUR 9m in one-offs and EUR 3m in added annual EBITDA as utilization rates improve. Q4’22 and Q1’23 energy costs in Europe might prove to be a bit lower than feared due to the mild winter, whereas the situation in the US may have been more challenging relative to expectations. Suominen should guide at least some EBITDA improvement for this year as H1’22 comparison base is so weak, however the Q4 report might be a bit too early to give very strong guidance.
Valuation neutral, uncertainties around improvement pace
The closure and lower USD represent some estimate headwinds, but we would still expect Suominen to grow by at least a few percentage points this year. Suominen’s valuation (8x EV/EBIT on our FY ’23 estimates) is not very challenging as profitability continues to improve from the lows, driven by higher top line and lower raw materials prices, but valuation already reflects improvement while a lot of uncertainty remains around its pace. We update our TP to EUR 3.5 (3.0); our rating is now HOLD (BUY).
Suominen’s margins remained very low in Q3, but the worst of cost pressures are easing and continued high demand, especially in the US, should begin to drive significant gains.
High growth but still low profitability margins in Q3
Suominen’s EUR 131.9m Q3 revenue grew by 34% y/y and topped the EUR 123.0m/121.5m Evli/cons. estimates. Growth was attributable to higher volumes, sales prices, and currencies in roughly equal portions. Early part of the quarter was still difficult especially due to low volumes in the US, but August and September were better as demand improved toward the end of Q3. There are still account-specific differences in the US with regards to the inventory build-up situation, but overall demand is clearly improving over the course of Q4. Meanwhile cost pressures remained larger than we estimated as profitability missed our estimates despite the high revenue. Gross profit was only EUR 5.2m vs our EUR 9.2m estimate, while the EUR 5.1m Q3 EBITDA (vs our EUR 7.0m estimate) benefited from tax credits.
US likely to continue to drive growth for some time
Americas already grew by 41% y/y to EUR 80m, while there should still be plenty of additional capacity to utilize in the US. It remains to be seen at how high a level Americas’ growth continues, but we would expect it to remain well above 20% for at least a couple of quarters. Meanwhile Europe’s growth should moderate over the course of next year as sales prices are no more to increase with raw materials prices (there’s also not that much additional capacity to utilize in Europe). We update our Q4 revenue estimate to EUR 145m (prev. EUR 129m).
US recovery and cost compensation to drive earnings up
Q3’s relative softness and the comments regarding the pattern of demand in the US over the quarter suggest Q4 will see steeper q/q improvement than we previously estimated. Earnings are set to increase from here, however considerable uncertainty persists around where the level will land next year. Further top line growth should be expected, due to demand volume trends, while energy costs will remain another profitability hurdle for at least a few quarters. We estimate 7.5% growth for next year, which in our view appears to be on the conservative side. Suominen remains valued a bit above 3x EV/EBITDA and 5.5x EV/EBIT on our FY ’23 estimates. We retain our EUR 3.0 TP and BUY rating.
Suominen’s Q3 profitability improved a bit from the recent lows but remained very modest and below our estimate as energy costs seem to have been a bigger challenge than we expected. Revenue topped estimates as sales volumes grew again in North America.
Suominen reports Q3 results on Oct 26. We make only minor estimate revisions ahead of the report as we continue to expect improvement over the coming quarters.
H1 profitability was very weak, but H2 is set to be better
Suominen’s Q2 profitability proved a lot worse than we expected as margins continued to decline. Higher raw materials and energy prices hurt while there was still no remarkable recovery in US volumes. In our view US volumes are no more such a big problem in H2, whereas the cost side developments are twofold. Raw materials prices seem to have already reached their peak, while it’s far from clear how much higher energy costs may climb over the coming winter months.
Higher margins driven by volumes and cost compensation
We find Suominen’s raw materials prices (a composite including pulp, polyester, and polypropylene) declined by a couple of percentage points q/q in Q3. The development helps H2 margins as Suominen’s mechanism pricing continues to catch up with the price inflation seen earlier this year. Meanwhile energy costs, especially for the two Italian plants but also in other locations including the US, have continued to soar. Suominen has also implemented additional energy surcharges in Q3 which will help profitability over the coming winter months. Q3 profitability will nevertheless remain very much subdued; we make only minor estimate revisions ahead of the report, and now estimate Q3 revenue at EUR 123m (prev. EUR 121m) and EBITDA at EUR 7.0m (prev. EUR 7.4m). We expect Americas’ revenue to have grown by 28% y/y, helped by strong USD as well as a recovery in volumes (partly thanks to production line conversions to better address current demand) and higher sales prices. We estimate line upgrades in Italy to have helped Europe to a 20% y/y growth.
US volume recovery is a key value driver from now on
Mechanism pricing and energy surcharges mean Suominen’s margins adjust to inflation incrementally and hence will rebound from the lows. US volume recovery is thus the crucial operational profitability driver from now on. In our view nonwovens wipes’ consumable nature helps their demand to stick high after the initial pandemic boost. Suominen’s valuation remains undemanding, some 3x EV/EBITDA and 5.5x EV/EBIT on our FY ’23 estimates. Our new TP is EUR 3.0 (3.5); we retain our BUY rating.
Suominen’s Q2 earnings missed estimates, but valuation isn’t very demanding on moderate estimate levels.
Suominen’s pricing will need to catch up some more in H2
Suominen’s Q2 revenue grew 4% y/y to EUR 118m, compared to the EUR 116m/118m Evli/cons. estimates. Americas’ EUR 64m top line was soft relative to our estimate despite the EUR 8m FX tailwind, however Europe continued to grow at a 16% y/y pace. We note neither Europe nor Brazil have seen inventory-related demand issues like the US. Group sales volumes improved just a bit q/q, in both Americas and Europe, but remained below the level seen a year ago as US customers still suffered from high inventories which have been blocking up the retail channel. The problem arose last summer and Suominen’s customers expected earlier inventories to have melted by the middle of this year. The problem has since eased somewhat, although not as fast as was expected. Sales prices continued to follow raw materials but not enough to fully compensate for the cost inflation, which resumed at a high single-digit q/q level in Q2. EBITDA thus fell to EUR 1.9m vs the EUR 7.0m/6.7m Evli/cons. estimates. Raw materials prices may now be stabilizing, however energy prices, especially in Italy, will continue to climb in H2.
Volumes are growing, yet cost inflation remains a nuisance
Q3 will mark an improvement thanks to growing volumes, as seen already in July, and higher prices as they continue to catch up with raw material inflation. Moist toilet tissue volumes are set to rise over the course of H2 thanks to US production line conversions, while Suominen has recently completed incremental investments in Italy and announced a EUR 6m production line upgrade in Finland. We do not hence view capacity utilization levels a pressing risk, however cost inflation remains an acute issue. We make some upward revisions to our H2 revenue estimates, but we revise our Q3 EBITDA estimate to EUR 7.4m (prev. EUR 10.8m). We see H2’22 EBITDA at EUR 20.5m.
Multiples aren’t demanding in the light of H2 improvement
We estimate a marked improvement for H2, although the level is still quite modest. Suominen is valued 4x EV/EBITDA and 7x EV/EBIT on our FY ’23 estimates, which aren’t very high levels on moderate estimates. We retain our EUR 3.5 TP and BUY rating.
Suominen’s Q2 profitability fell clearly below estimates as cost inflation continued again relatively strong. Profitability will nevertheless improve in Q3 and especially in Q4.
Suominen reports Q2 results on Tue, Aug 9. We continue to expect q/q improvement over the weak Q1 results.
Some improvement should already be visible
Suominen’s Q1 figures were very soft, largely as expected although the EUR 3.3m EBITDA was somewhat below estimates. Q2 profitability is to remain at a modest level due to the spike in European energy costs, which in the case of Suominen amounts to mostly electricity. We believe the energy surcharge Suominen announced in Q1 will help Q2 profitability to improve q/q, however we estimate EBITDA to have declined more than 50% y/y to EUR 7.0m. We note raw materials prices surged at double-digit rates in H1’21, and even though there were some signs of stabilization before the war price levels have continued to advance over the spring and summer months. Suominen’s nonwovens pricing therefore continues to catch up with higher raw materials costs at least over this summer.
H2’22 EBITDA should be clearly better than the recent lows
We make only marginal estimate revisions ahead of the report. US demand may still fluctuate on a quarterly level due to the supply chain issues, but we expect Americas revenue to be up by 4% this year relative to last, when especially Q3 figures received a hit. Strong dollar will help top line and we estimate 6% growth for this year. The estimated EUR 469m revenue would be above the previous record of EUR 459m seen in FY ’20, however weak H1’22 profitability means FY ’22 EBITDA will stay far below the previous record. Suominen’s EBITDA amounted to only EUR 13m in H2’21 and we estimate the figure to have declined even lower, to EUR 10m, in H1’22. It remains unclear how much the figure will improve in H2’22 as cost inflation has not abated from the agenda; we estimate the figure at EUR 23m.
Valuation multiples are low on modest earnings levels
Suominen’s earnings can deviate a lot from those of its peers, but valuation is by no means challenging considering the low level from which profitability is likely to bottom out this year. Suominen trades around 4x EV/EBITDA and 6.5x EV/EBIT on our FY ’23 estimates. The level implies a discount of 50% relative to peers while we don’t consider our margin estimates for FY ’23 very challenging. We retain our EUR 3.5 TP and BUY rating.
Suominen’s Q1 results and guidance downgrade weren’t that big negatives in our view, however there’s high uncertainty around the upcoming improvement pace. We nevertheless continue to expect significant gains for H2.
Q1 results and guidance downgrade were minor negatives
Suominen’s EUR 110m Q1 top line landed close to the EUR 109m/115m Evli/cons. estimates. Revenue declined by 4% y/y as volumes decreased to an extent where higher sales prices could not help. Americas was a bit softer than we expected, while Europe compensated for the shortfall. The EUR 6.6m gross profit didn’t land that much below our EUR 7.1m estimate, but higher admin costs meant the EUR 3.3m EBITDA was below the EUR 4.8m/4.4m Evli/cons. estimates. Suominen revised its guidance down, but this wasn’t such a significant negative in the light of the current uncertain environment and Suominen’s P&L’s sensitivity to various factors. In our opinion Suominen’s profitability is set to improve from the current lows.
Q2 should already improve a bit q/q
Demand fluctuations remain in certain wiping product categories for now as high inventory levels continue to caution some US customers. Suominen’s response is to adjust its sales mix by repurposing manufacturing lines to better meet demand. Suominen has also been looking for new customers. There’s uncertainty around the overall improvement pace with regards to the whole supply chain, but we continue to expect revenue growth for this year. Increased energy costs (mostly electricity for Suominen) continue to weigh Q2 results to some extent, along with higher raw materials prices, but we see Q3 performance a lot improved. We trim our Q2 EBITDA estimate to EUR 7.5m (prev. EUR 9.7m). Our revised EBITDA estimate for this year stands at EUR 36.0m (prev. EUR 39.8m).
Valuation is by no means demanding
Suominen is valued around 5.5x EV/EBITDA and 12x EV/EBIT on our FY ’22 estimates. These are yet not particularly low multiples, but we continue to expect significant profitability improvement for H2. We now estimate 6.0% EBIT margin for next year (prev. 6.5%), and hence Suominen is valued about 4x EV/EBITDA and 6.5x EV/EBIT on our FY ’23 estimates. Our new TP is EUR 3.5 (4.0) as we retain our BUY rating.
Suominen’s Q1 results landed relatively close to estimates, although on the softer side. The company revises its earnings guidance down due to intensified cost inflation, while customer inventory levels in the US are normalizing but not as fast as expected.
Suominen reports Q1 results on May 4. We revise our H1’22 profitability estimates down a bit due to higher raw materials and energy prices, yet we continue to expect significant improvement for H2’22.
Q1 wasn’t great, but Q2 will already be much better
Suominen flagged in its Q4 report Q1 demand to be again on the low side as certain customers, particularly in the US, still suffer from destocking. We see no changes to this Q1 picture. Some logistics bottlenecks likely continue to persist, although in general pandemic disruptions are subsiding. We also believe wiping demand remains structurally above the pre-pandemic level, including in categories like hard surface disinfecting wipes and moist toilet tissue, and hence top line and margins should again improve after a muted Q1. Margins are to rebound from the recent lows as Suominen has in the past few years tilted towards mechanism pricing, which helps now when raw materials prices stay high. Suominen has had no meaningful Russian sales or sourcing, but the war affects the European plants’ profitability through higher energy costs. Suominen has implemented an energy surcharge on all European products (there have been no major energy issues in the US). This will not save Q1 results, but we understand the customers have accepted the surcharge well and it supports margins from Q2 onwards.
We estimate significant profitability improvement for H2
We make only small estimate changes on an annual level. We now expect FY ‘22 revenue to top the record FY ’20 figure; we however estimate profitability to be some EUR 20m below the respective figure especially due to muted H1. We revise our Q1 EBITDA estimate to EUR 4.8m (prev. EUR 5.8m) as Suominen’s mechanism pricing and energy surcharge lag the inflation seen early this year. We see H1’22 EBITDA down by 57% y/y, however we estimate H2’22 EBITDA to increase by 92% y/y and 75% h/h.
Valuation is by no means challenging on our estimates
Suominen is valued 5.5x EV/EBITDA and 11x EV/EBIT on our FY ’22 estimates. In our view these aren’t very high levels and would be down to about 4x and 6.5x in FY ’23 if profitability continues to improve as we expect. We revise our TP down to EUR 4 (5) as higher raw materials and energy prices have elevated uncertainty around the estimates, but we retain our BUY rating.
Suominen’s Q4 performance didn’t meet estimates, at least in terms of profitability, and FY ’22 guidance also disappointed as the issues which surfaced last summer continue to trouble in the short-term.
Certain customers still suffer from high inventories
Suominen’s Q4 revenue grew by 4% y/y to EUR 115.6m, ahead of the EUR 113.0m/113.3m Evli/cons. estimates. Europe amounted close to what we expected, while Americas was ahead, but gross profit was only EUR 8.4m vs our EUR 14.4m estimate. Suominen’s pricing improved but not to the extent we expected, and hence high variable costs ate margins. The pandemic also caused plant-level problems. The EUR 9.0m EBITDA benefited from cost cuts but didn’t meet the EUR 12.1m/12.6m Evli/cons. estimates. Some customers’ high demand resumed, but others continued to languish as inventories remained elevated. There’s now a short-term see-saw pattern in demand which manifests itself in y/y lower Q1’22 top line. The demand issues are very customer-specific but happen to impact Americas for the most part. There seem to have been no major changes in this respect. Suominen expects end consumer demand to remain above pre-pandemic levels, and the picture should again improve in Q2.
We cut especially H1’22 estimates
Raw materials prices have overall stabilized, but there’s been mixed development as e.g. pulp has declined while viscose has advanced. Meanwhile US logistics issues persist, and transportation costs remain high. The completed investments, on the other hand, pose no major ramp-up costs. We cut our FY ’22 revenue estimate to EUR 455m (prev. EUR 467m) and that for EBITDA to EUR 40.8m (prev. EUR 50.9m). We cut FY ’23 profitability estimates by ca. EUR 2-3m. The estimate cuts concern particularly H1’22, from where we expect improvement.
Margins and multiples are low relative to peers
Suominen’s multiples remained low before the report, but they still didn’t sufficiently reflect the persistent current uncertainty. Suominen is valued around 5.0-6.5x EV/EBITDA and 8.0-12.5x EV/EBIT on our FY ’22-23 estimates. The absolute multiples are not that low for this year, but we expect improvement over the year; Suominen remains valued below peers while margins are also low. Our new TP is EUR 5 (6); we retain our BUY rating.
Suominen’s Q4 revenue topped expectations, but profitability didn’t reach estimates. Suominen also guides decreasing EBITDA for FY ’22, particularly due to challenging Q1, while we had expected flat development.
Suominen reports Q4 results on Thu, Feb 3. We leave our Q4 estimates unchanged but make small upward revisions to our FY ’22 estimates due to FX changes.
Q4 figures should improve a lot from the Q3 lows
Suominen’s Q3 figures fell a lot more than was expected, but the report provided encouraging comments on outlook; performance should improve significantly already in Q4, and we continue to expect about EUR 8m q/q gain in Q4 EBITDA. We estimate the figure at EUR 12.1m, while we see top line grow 2% y/y and close to 15% q/q from the Q3 lows. We expect European revenue to reach new highs, while we see Americas still somewhat down from the peak levels but up 16% q/q. The relatively modest and completed investments in Italy and the US support growth this year, and we expect revenue to surpass the record set in FY ’20, but profitability is unlikely to reach the recent peaks during the next few years.
We expect only marginal profitability improvement from Q4
We find Suominen’s key raw materials prices basically flatlined q/q in Q4; this supports our view according to which incremental margin gains continue from Q4 onwards. USD has strengthened some 5% in the past three months and thus we raise our FY ’22 revenue estimate to EUR 467m (prev. EUR 455m). We continue to expect 6.5% EBIT margin for this year and hence flat absolute profitability, in other words EUR 50.9m in EBITDA. We expect Suominen to loosely guide flat profitability for FY ’22; negative wording seems unlikely considering the softness of Q3’21, while any commitment to positive development appears premature as many key variables remain much in flux.
Peer margins are expected to gain some 200bps in FY ‘22
Suominen’s valuation and estimates haven’t changed much in the past few months. The company continues to trade around 5.5x EV/EBITDA and 9x EV/EBIT on our FY ’21-22 estimates. The FY ’21 multiples are significantly below those of peers because the group is expected to gain some 200bps in FY ‘22 EBIT margin. Meanwhile we estimate Suominen’s FY ’22 EBIT margin down a bit due to the high figures seen in early FY ’21. Suominen’s multiples discount narrows this year due to the peers’ earnings accretion. We retain our EUR 6 TP and BUY rating.
Suominen’s Q3 gross margin was hit hard, but the guidance and comments on Q4 volumes prompt us to make some positive estimate revisions for next year.
Q3 figures were hit hard, but situation is already improving
Q3 revenue fell by 14% y/y to EUR 99m vs the EUR 96m/100m Evli/cons. estimates. Americas’ top line declined by 21% y/y and that for Europe 4%. There weren’t that many surprises in terms of volumes, but the decline hit gross margin more than expected as the figure fell to 5.5% (vs our 12.0% estimate). Q3 EBITDA thus came in at EUR 4.2m, compared to the EUR 9.5m/9.0m Evli/cons. estimates. Certain (mostly) transient cost measures helped to the tune of EUR 1-2m. According to Suominen there is considerable variation within US customer accounts’ demand, which in our view reflects the local logjam situation where certain non-branded wipes inundated the retail channels and thus blocked many Suominen’s brand wipe customers’ sales.
Our new FY ’22 revenue estimate is EUR 455m (EUR 431m)
We estimate Q4 revenue at EUR 113m (prev. EUR 95m); Suominen sees Q4 volumes a bit lower than in Q2’21, and we expect the respective revenue figures to be similar as nonwovens pricing adjusts to higher raw material prices. Underlying wiping demand remains robust, but there’s still a lot of uncertainty regarding short as well as long term financial performance. Pricing adjusts up in Q4 and we believe margins will continue to improve also early next year. The guidance implies Q4 EBITDA will be roughly in the EUR 9-15m range. The midpoint suggests EUR 48m annual EBITDA, and in our view the figure has a good chance of landing in the EUR 45-50m range: we expect continued q/q improvement from Q4, meaning FY ’22 EBITDA should be well above EUR 40m even if Q4 EBITDA lands at the low end of the range. We previously estimated FY ’22 EBITDA at EUR 48.5m and our revised estimate stands at EUR 50.1m.
We expect annual EBITDA to stabilize around EUR 50m
The volume recovery also means the completed Cressa line as well as the other two projects will not have to suffer from low utilization rates. Suominen is valued around 5.5x EV/EBITDA and 9.5x EV/EBIT on our FY ’21-22 estimates as we expect flat annual profitability development and meaningful volume improvement from the Q3 lows. We retain our EUR 6 TP and BUY rating.
Suominen’s Q3 revenue was close to estimates, but gross margin plunged 5.5%. EBITDA therefore fell to EUR 4.2m, way below estimates. Suominen nonetheless sees demand recovery is already underway. Suominen’s guidance implies Q4’21 EBITDA will roughly triple q/q.
Suominen releases Q3 results on Oct 28. The company issued a negative profit warning just before the release of its Q2 report; we make no changes to our lowered estimates ahead of the Q3 report.
We leave our estimates unchanged for now
Suominen’s Q2 was still good in terms of revenue and profitability, although the US inventory pile-up already began to have an effect and led to some top line softness. Americas’ Q2 revenue declined by 13% y/y and thus Suominen’s EUR 114m top line fell short of the EUR 120m estimates (Europe still grew by 3% y/y). Suominen’s gross margin however remained a strong 14.7%, which helped the company to reach EUR 15.3m in EBITDA, in other words somewhat above estimates. We revised our H2’21 as well as FY ’22 estimates down, and we leave our estimates unchanged ahead of the report. We still expect Americas’ Q3 revenue to have dipped by 24% y/y; we estimate 6% y/y drop for Europe. We estimate Q3 EBITDA at EUR 9.5m.
Focus will be on the US volume recovery from Q4 onwards
We see Suominen H2’21 revenue down by 16% y/y. The effect, when combined with our estimated ca. 400bps y/y softening in gross margin, is a EUR 12m y/y decrease in H2’21 EBITDA to EUR 19.6m. We find raw materials prices relevant for Suominen did not gain that much during Q3, at least compared to the surge seen in Q2. The Q3 report’s focus will be on how the US inventory situation looks now and to what extent the supply jam can be expected to dissolve by the end of Q4. We also expect Suominen to have either completed or to be near completing the announced investments in Italy and the US.
Some y/y softness in FY ’22 EBITDA due to strong H1’21
We estimate FY ’22 revenue at EUR 431m, which implies on average 13% higher quarterly revenue going forward from H2’21. We expect this growth to help operating margins up by ca. 100bps from our estimated Q4’21 levels, and we therefore estimate FY ’22 EBITDA at EUR 48.5m, down by some EUR 5m y/y. Suominen is now valued around 5.5x EV/EBITDA and 9x EV/EBIT on our FY ’21-22 estimates. We consider these levels very modest despite the uncertainties related to volumes and gross margins. We retain our EUR 6 TP and BUY rating.
Suominen’s earnings will now correct to a lower level from their recent peak. We believe, despite the setback and increased uncertainty, that Suominen’s value chain positioning is still good, and decent margins will remain.
US delivery volumes will take a big hit in H2’21
Q2 revenue fell 7% y/y to EUR 114m and missed the estimates, which were at EUR 120m. In our view the softness was due to Americas; the US supply chain has lately been saturated with wipes as the local retailers sourced as much product as possible, including unbranded wipes which then didn’t move forward from the shelves and thus blocked volumes for many brand wipes. Suominen’s US brand name customers were pushing for max delivery volumes as late as May and June, and by the end of Q2 stocks began to pile up. Suominen says the logjam hasn’t for the most part spread beyond the US; LatAm has continued to develop as before while there has been some jamming in Europe. In our view the 14.7% GM was an encouraging sign, considering the metric also benefits from high volumes, as revenue was soft compared to estimates. Suominen thus reached EUR 15.3m in Q2 EBITDA, compared to the EUR 14.8m/13.5m Evli/cons. estimates.
We believe GM will remain near 13% going forward
Suominen’s nonwovens pricing is now to a large extent locked into mechanisms and so we believe gross margin will remain at a decent level going forward, at around 13% or so. We estimate Q3 revenue to decline by 17% y/y as we see Americas down by 24%. We expect gross margin to decline to 12%, which translates to EUR 9.5m in EBITDA. We expect some stabilization already in Q4, but we revise our FY ’22 revenue estimate down to EUR 431m (prev. EUR 473m) and that for EBITDA to EUR 48.5m (prev. EUR 56.0m). It is now clear earnings have peaked and Suominen may not reach EUR 15m quarterly EBITDA for a while. We however believe Suominen can achieve above EUR 10m quarterly EBITDA again soon enough.
The sell-off already neutralized earnings multiples
Suominen’s earnings multiples were low already before the profit warning, at about 6x EV/EBITDA and 9x EV/EBIT. We find the net effect of the sell-off and our earnings downgrade has been a marginal increase in multiples. We consider these levels very reasonable. Our TP is now EUR 6 (6.8). We retain our BUY rating.
Suominen’s Q2 margins remained strong, but focus is now on the color Suominen provides on demand slowdown and inventory build-up in North America. The issue prompted the company to revise down its FY ’21 profitability outlook just ahead of the report.
Suominen reports Q2 results on Fri, Aug 13. We make only small adjustments to our estimates and continue to view valuation not too demanding.
There’s downward pressure from the late profitability peak
Suominen’s Q1 marked a record high profitability despite raw materials and logistics challenges. Raw materials prices began to spike in Q1, but inventories and nonwovens pricing dynamics meant the negative effect was not yet large. Raw materials prices however continued to surge in Q2, and we now expect Suominen’s Q2 gross margin to have declined by 350bps q/q to 14%. We estimate Q2 revenue at EUR 120m, down by 2% y/y, and EBITDA at EUR 14.8m. Raw materials prices have shown some cooling signs over the summer and we continue to expect gross margin to settle around 13.5% going forward.
Additional investments appear forthcoming
Suominen’s business has received a pandemic boost, but high demand seems to persist. The company has also sharpened its own operational performance. Suominen recently issued a EUR 50m bond to be used for general corporate purposes. In our opinion the company had more than ample liquidity already before the transaction, and thus we see the extended financing hinting at growth plans. Suominen may be planning organic investments, but M&A is not off the table and we believe new geographies, in particular Asia, are now on the radar screen.
We still see some upside to current valuation multiples
Glatfelter, which in our view is the most relevant listed Suominen peer, has just announced the acquisition of Jacob Holm for an EV of USD 308m. Glatfelter estimates Jacob Holm’s Jun-21 LTM EBITDA of USD 45m includes pandemic demand benefit to the tune of USD 10-15m and expects to realize some USD 20m in annual cost synergies within 24 months of closing. These figures suggest, in the most optimistic scenario where the pandemic benefits persist and synergies are fully realized, an EV/EBITDA as low as 4.7x. If the benefits vanish the synergized multiple settles between 5.6x and 6.2x. Suominen is now valued around 6x EV/EBITDA and 9x EV/EBIT on our estimates; these levels are somewhat below those of Glatfelter and other peers. In our opinion Suominen’s valuation still appears conservative. Our new TP is EUR 6.8 (6.5) per share; we retain our BUY rating.
Suominen reached very high margins once again. We expect margins to settle in H2’21 and continue to view earnings multiples attractive on such stabilized levels.
Suominen once again topped previous profitability records
Suominen’s EUR 115.3m Q1 revenue was close to expectations while the EUR 18.5m EBITDA topped the EUR 15.3m/15.2m Evli/cons. estimates. Gross margin hit a record due to high volumes and improved production as well as raw materials efficiency. Favorable sales mix helped pricing levels to improve a bit y/y. There were some raw materials and logistics challenges, especially in the US, which had a negative impact on production. The Texan winter disrupted oil-based raw materials’ supply, but in our view the effect on overall results wasn’t that big. Suominen carries some raw materials inventories, which in part explains why the raw materials price spike didn’t yet have any notable negative effect on profitability.
Suominen has increased its mechanism pricing exposure
The pandemic led to a wipes demand bump on both sides of the Atlantic; although the US is ahead of Europe in vaccination rates the higher demand shows very little signs of abatement. The raw materials inflation picture also looks similar on both continents. Suominen increased its share of mechanism pricing clauses already last year to protect itself against raw materials price inflation. These measures, coupled with strong wiping demand and improved sales mix, enhance our confidence regarding H2’21 gross margin, which we now expect to settle around 13-14%. Suominen expects to complete the three announced investments in H2’21. Two of these will add capabilities to existing lines while one restarts and modernizes an idle line and so adds capacity.
We expect gross margin to settle around 13-14% in H2’21
Suominen is set to reach EUR 60m EBITDA this year even when raw materials inflation begins to erode margins. This year is also proving extraordinary in its own way as the raw material and logistics markets have been outright chaotic. In our view H2’21 results should show stable gross margin levels. We estimate ca. 14% GM for H2’21 that translates to some 12% EBITDA and 7.5% EBIT margins. We expect Suominen to reach such figures in FY ’22. Suominen is valued below 6x EV/EBITDA on our FY ’21-22 estimates. We retain our EUR 6.5 TP as well as our BUY rating.
Suominen’s Q1 profitability remained very strong and the quarter was actually better, in terms of EBITDA and EBIT, than the previous record seen in Q3’20. Suominen retains its full-year outlook.
Suominen reports Q1 results on Wed, Apr 28. We leave our operative estimates unchanged ahead of the report and retain our EUR 6.5 TP and BUY rating.
Demand remains strong but costs are also rising
Suominen’s FY ’21 outlook, issued in February, guides flat comparable EBITDA development y/y. We didn’t find this guidance surprising and revised our FY ’21 EBITDA estimate up only a tad from EUR 55.3m to EUR 56.5m (Suominen posted EUR 60.9m in FY ’20 EBITDA). The guidance however contained a disclaimer with respect to the present uncertainty in the raw materials and cargo markets. Suominen had assumed pricier raw materials going forward, but the recent ca. 20% quarterly level gains seen in inputs such as pulp, polyester and polypropylene may have been larger than the company expected. It’s also unclear how e.g. the Suez Canal blockage might have disrupted the relevant supply chains.
We expect gross margin declines over the year
The recent raw materials price gains exert clear negative pressure on Suominen’s gross margin for their part, but on the other hand the company should still be able to defend its own nonwovens pricing to some extent. The pricing dynamics will also register with a certain lag. We leave our operative estimates unchanged ahead of the Q1 report. We continue to expect gradual decrease in gross margin throughout the year. We estimate Q1’21 gross margin at 14.5% and arrive at EUR 15.3m EBITDA with our revenue and operative cost assumptions. Suominen recently announced the sale of its minority stake in Amerplast, a plastic packaging business, and the transaction will have a positive EUR 3.7m impact on financial items. The sale is not all that meaningful in the big picture given the fact that Suominen divested the majority share already in 2014 to focus on nonwovens. It will however further strengthen the already strong balance sheet.
Cautious earnings multiples following the record year
Suominen remains valued at modest multiples of around 6x EV/EBITDA and 10x EV/EBIT on our estimates for this year. We continue to see upside on these levels as Suominen’s earnings are stabilizing and cash flow generation is strong. We retain our EUR 6.5 TP and BUY rating.
Suominen’s Q4 figures were close to what we expected, but the report turned our overall view a bit more positive. Our TP is now EUR 6.5 (6.0) and we retain our BUY rating.
Q4 was a strong ending for an extraordinary record year
Suominen’s Q4 revenue grew by 18% y/y to EUR 111m (vs our EUR 106m estimate). Europe grew by 37%, albeit from a very low base. Americas still managed to grow a decent 7%. The 15.6% GM was a tad above our 15.0% estimate. SGA were slightly above our estimate and certain non-recurring expenses, such as bad debts, weighed the bottom line a bit. The EUR 8.5m EBIT thus didn’t top our EUR 8.7m estimate. Suominen sees nonwovens demand will remain on a high level. In our view the 12% y/y revenue growth for FY ’20 makes further gains hard to achieve in FY ’21. We expect Suominen to post flat top line this year.
In our opinion outlook and comments were encouraging
Suominen expects FY ’21 EBITDA to remain in line with FY ’20 (EUR 61m). We view this outlook to be close to what we estimated prior the report. We revise our FY ’21 EBITDA estimate up only a bit, from EUR 55m to EUR 57m. The revision is not big in quantitative terms, yet we see the outlook improves confidence with respect to this year’s results. In our opinion there was a small risk Suominen might have guided declining FY ’21 EBITDA. There remains considerable gross margin uncertainty as raw material and transportation costs appear bound to trend upward, but all in all we view Suominen’s comments to indicate the nonwovens pricing environment is still relatively strong. In other words, gross margin is unlikely to plunge.
We view current valuation attractive on stabilizing earnings
Suominen trades 6x EV/EBITDA and 10x EV/EBIT on our FY ’21 estimates. Recent developments mean a high level of uncertainty persists around profitability margins going forward, however we are now more confident on earnings stabilization. Performance has improved with regards to plant-level efficiency, although the pandemic boost makes it hard to quantify how much these own measures have impacted figures. Suominen has announced certain small investments to upgrade some of its existing production lines, and we see the company is now in a strong position for possible larger investments, be they organic or inorganic. Our new TP is EUR 6.5 (6.0). We retain our BUY rating.
Suominen’s Q4 EBIT landed very near our estimate, but all considered the report was perhaps a bit better than we expected.
Suominen reports Q4 results on Feb 4. Our Q4 estimates are intact but we make small revisions due to changes in EUR/USD. In our view Suominen can achieve flat top line in FY ‘21 while profitability faces headwinds after an extraordinary year. We retain our EUR 6 TP and BUY rating.
We expect gross margin to decline somewhat from now on
We estimate Americas and Europe to have continued to grow by 9% and 18% y/y respectively in Q4. These rates are very similar to the ones seen in Q3. We expect Q4 gross margin to have declined from the very high 17.1% Q3 figure to 15%, and thus estimate EBITDA down by EUR 4m q/q. USD has weakened by ca. 3% relative to EUR in the past three months and we update our estimates to incorporate the approximately EUR 10m headwind this represents to FY ’21 Americas revenue. We consequently estimate EBITDA down by about EUR 6m in FY ’21 due to pressure on gross margin. We would be surprised if Suominen guides profitability development to be better than flat.
Wipes demand is strong while input prices are recovering
Raw materials prices found their lows in Q4; there wasn’t yet any major spike. Prices have continued to climb so far this year, and this raises uncertainty regarding Suominen’s H1’21 gross margins. There was already negative nonwovens pricing pressure in Q4’20, following the weak H1’20 raw materials prices with a lag. In a more ordinary environment such developments would represent a clear hit on Suominen’s gross margin, however we see there’s still a chance these adverse forces will be somewhat muted by the current extraordinary wipes demand situation. Double-digit top line y/y growth is on the cards for Q4’20 and Q1’21, but beyond that the respective comparison periods turn challenging. We expect only flattish development beyond Q1’21.
Earnings multiples are still very reasonable
Last year has left the bar very high. We estimate Suominen to have recorded more than EUR 60m in FY ‘20 EBITDA and some EUR 40m in EBIT. We don’t see the company reaching such figures again any time soon, yet we expect EBITDA and EBIT to stabilize around ca. EUR 55m and EUR 35m during the next few years. On these estimates Suominen now trades around 6x EV/EBITDA and 10x EV/EBIT, a level which we continue to view attractive. We retain our EUR 6 TP and BUY rating.
Suominen again topped expectations. We update our estimates, our TP is now EUR 6.0 (5.5) and rating still BUY.
Another extension to a steep upward profitability trend
Suominen recorded EUR 115.4m in Q3 revenue, up by 12% y/y and down by 6% q/q, meeting our EUR 114.0m estimate. FX had a negative EUR 5.6m impact. Europe remained very strong (up by 17% y/y), and at EUR 43.5m topped our EUR 41.0m estimate. Americas grew by 9% y/y and at EUR 71.9m was close to our EUR 73.0m estimate. Suominen delivered high volumes and margins despite maintenance breaks, which will also take place in Q4. While the results were near our estimates in terms of top line, margins were again a positive surprise. Suominen achieved a 17.1% gross margin, gaining more on the 16.0% in Q2 and clearly higher than our 15% estimate. Low raw materials prices in general continue to exert pressure on nonwovens pricing, however the pricing clauses work with a lag and Suominen was also able to defend its pricing to some extent. Suominen has been very successfully achieving production cost efficiencies and says the variable cost optimization program continued to yield results on all sites. The company managed strong with SGA, R&D and other expenses as well since the total item was only EUR 6.8m, compared to our EUR 7.3m estimate. Suominen’s EUR 12.9m Q3 EBIT thus clearly beat our EUR 9.8m estimate.
We expect Q4 earnings to decline by some EUR 4m q/q
Although the company continues to perform strong not only due to a favorable environment but also thanks to in-house measures, we expect results to decline q/q in Q4. We now expect Q4 gross margin at 15% and continue to see some further pressure down next year. Raw materials prices have remained low for quite some time and hence are unlikely to support additional boost in profitability. On the positive side wipes demand should remain high for an extended time period.
Multiples attractive despite margin pressure going forward
Suominen is now valued ca. 5.5x EV/EBITDA on our estimates for this year. Going forward, we see additional earnings gain hard next year. In our opinion somewhat low earnings multiples are warranted given the extraordinary environment, but we nevertheless continue to view the overall valuation picture attractive. Our TP is now EUR 6.0 (5.5) and rating remains BUY.
Suominen’s Q3 figures continued to defy our expectations as marginal profitability increased further q/q despite being already exceptionally high in Q2.
Suominen reports Q3 results on Tue, Oct 27. Our estimates, EUR 5.5 target price and BUY rating all remain intact.
No clear reason to expect softening wipes demand for now
In our opinion outlook is solid even after an exceptionally strong Q2, when revenues in Americas and Europe grew y/y by 19% and 16%. Fatigue and possibly growing indifference towards hygienic considerations could limit wipes growth at a certain near future point, however many reports suggest this unlikely to happen at least during the next few quarters. According to a New York Times article some consumers in the US prize canisters of Clorox disinfecting wipes as kinds of trophies since the item remains such a rare sight on store shelves. Many companies have formed partnerships with Clorox to reassure employees and customers that surfaces can be kept disinfected. Clorox saw wipes demand grow by 500% in a few months and inventory usually enough for 1-2 months gone in 1-2 weeks. Clorox was able to up production and plans to add more early next year. This is just one brand-specific example from the downstream part of the supply chain, but we believe it’s still relevant for upstream nonwovens suppliers. The US is also a key market for Suominen since the Americas BA contributes ca. 65% of revenue. Although European consumers may not be as keen wipers as their American counterparts, we believe the recent pandemic acceleration continues to lift volumes on both sides of the Atlantic.
There are no changes to inform estimate revisions
We view Suominen well-positioned to post double digit y/y growth rates during the next couple of quarters. With regards to H2’20 top line figures we see the uncertainty associated mostly with the scheduled maintenance breaks at several Suominen plants and to what extent exactly these will negatively affect production and delivery volumes. Raw materials prices have continued to develop flat and hence we still expect gross margin to decline from 16% in Q2 to 15% in Q3. There has also been basically no change to FX rates lately and so our EUR 114m revenue and EUR 9.8m EBIT estimates for Q3 remain intact.
We consider the conservative multiples attractive
Suominen continues to trade well below 6x EV/EBITDA on our estimates, compared to a historical average of 6.5x. We find this an attractive level and so retain our EUR 5.5 TP and BUY rating.
Our estimates and EUR 5.5 TP are intact; retain BUY rating.
Fundamentals now materially firmer in short and long term
Suominen’s turnaround materialized in a very swift fashion this past spring. Figures were considerably soft as late as Q4’19 when top line slipped in both business areas, especially so in Europe. Americas grew again in Q1’20 but Europe still declined some 11% y/y. While overall Q1 was already a positive surprise in terms of profitability, revenue nevertheless continued to develop flat y/y. Then Suominen proceeded to issue two positive profit warnings during a span of two months in spring and early summer. However strong indication of improving performance this was, our estimates could not exactly keep up with the pace and hence Q2 figures trounced our expectations. Although the groundwork for solid improvement had been laying back there for some time (thanks to e.g. sustainable product introductions), it seems basically all the factors happened to align favorably during the spring. Both Americas and Europe posted revenue increases in the high teens, which also helped production efficiency. Investments in US production assets were ready to pay off. Product mix improved some more while nonwovens prices did not decline quite as much as those of raw materials.
Success in sustainable products helps to reach targets
The notable pre-pandemic challenges have vanished. Strong wipes demand means nonwovens supply-demand balance now tilts much more favorably from a manufacturer’s point of view, at least in the short-term. Despite this we expect some softening in Suominen’s H2 figures as nonwovens prices tend to follow raw materials prices closely, in addition to which several Suominen plants will go through scheduled maintenance breaks. The Q2 records place the bar high for next year, but in our view Suominen’s long-term financial targets look credible. Success in sustainable products (in Suominen’s case increasing share of wood-based fibers) could well defend margins also in the long-term, although the innovations’ profitability remains to be tested in a scenario where significant new capacity enters the market.
We see upside relative to historical earnings multiples
We continue to view Suominen’s below 6x EV/EBITDA multiples attractive. Our TP is EUR 5.5 and we retain our BUY rating.
Suominen hosted a virtual CMD yesterday. Although there were no major updates the event nevertheless added some color on recent trends. Our TP remains EUR 5.5, rating BUY.
Volumes are up globally due to cleaning and disinfection
The pandemic has lifted volumes in all markets and Suominen expects elevated demand to persist at least for the next few months. Permanently higher demand is likely within cleaning and disinfection products. Suominen estimates it has an above 15% wiping market share in Europe and is thus the leading player. All segments have enjoyed strong demand, household wiping especially so. Americas’ development has been similar and stores in the US still often have trouble shelving enough household cleaning products. Nielsen Homescan estimates 79% of US households now consider disinfecting wipes a staple item (vs 50% prior to the outbreak). Certain interesting consumer behavior anecdotes were discussed e.g. how Uber riders can now check before boarding whether the ride will feature Clorox disinfecting wipes. Luckily the new assets in Bethune and Green Bay were ready to meet surging demand. Indeed, the plant in Bethune was able to finally reach performance targets. In general, Suominen aims to grow with its current major customers and we see the company well-positioned to capture above market growth (thanks to competitive product portfolio), according to the long-term financial targets updated previously this year. Margins should stay relatively high in the short-term and Suominen might even be able to defend its nonwovens pricing, despite lower raw materials prices, as high wiping demand continues to persist together with the pandemic.
Our estimates remain unchanged for now
The CMD did not lead us to revise our estimates at this point. We expect some softening in gross margin and thus in EBITDA following the exceptionally strong Q2 (Suominen posted a 14.7% EBITDA margin, compared to the above 12% long-term target).
Further improvement not very easy but multiples are low
2020 will be a new record year for Suominen in terms of financial performance and in our view further gain in EBITDA next year can prove tricky. However, we continue to view current valuation attractive (EV/EBITDA is ca. 5.5x on our estimates for this year and next). We retain our EUR 5.5 TP and BUY rating.
Suominen’s Q2 was way above our estimates. The major question now is where gross margin settles as the dance between nonwovens and raw materials prices plays out. We have upgraded our estimates, our new TP is EUR 5.50 (4.75) and we retain our BUY rating as multiples remain low.
Q2 performance was in our view exceptionally strong
Suominen posted EUR 122.2m in Q2 revenue (up 18% y/y and compared to our EUR 115.0m estimate), a record high despite lower nonwovens prices (reflecting soft raw materials) as volumes grew considerably due to high wiping demand. Both Americas and Europe did brisk volumes and posted revenues respectively at EUR 77.2m (up 19% y/y) and EUR 45.0m (up 16% y/y). Gross margin also increased almost another 400bps q/q to 16.0%. We note this is a record figure (vs e.g. 14.7% GM back in Q3’14) and likely not sustainable long-term. Record revenue and gross margin led to EUR 19.5m gross profit vs our EUR 14.4m estimate. SG&A and R&D remained flat at EUR 7.8m and thus the EUR 12.4m EBIT trounced our EUR 6.8m estimate.
We expect some softening in gross margin going forward
Suominen’s H1 was unexpectedly strong as improving product mix, production efficiency and low raw materials prices led to big margin gains. The pandemic also helped business as demand for wipes increased and Suominen was able to meet the challenge. However, production volumes will be lower in H2 due to scheduled maintenance stoppages at several plants. We nevertheless continue to see the demand and volume outlook strong since the pandemic is unlikely to fade away soon. With respect to profitability we expect the gross margin to have topped out. We don’t expect significant downward correction in the short-term as nonwovens and raw materials prices are in practice highly correlated. Given the current price data we expect Q3 gross margin at 15% and Q3 EBIT thus at EUR 9.8m.
Multiples still quite reasonable on our updated estimates
Suominen also announced an EUR 8m investment in Cressa, Italy. The production line upgrade will enhance capacity and seems a straightforward measure to address growing demand. All in all, we see further upside potential despite sharp rerating this year. On our updated estimates Suominen now trades slightly below 6x EV/EBITDA FY ’20. Our new TP is EUR 5.50 (4.75), rating BUY.
Suominen’s Q2 results wiped the table clean with our estimates.
Suominen reports Q2 results on Wed, Aug 12. We have slightly lowered our revenue estimates due to a currency headwind, while on the other hand we now expect gross margin to have improved modestly q/q also in Q2. Our new TP is EUR 4.75 (4.25), and thus we reiterate our BUY rating.
Raw materials prices imply gross margin should hold high
Suominen posted a big gross margin jump in Q1 as the figure gained almost 400bps q/q to 12.1%. Improved product mix and production efficiency as well as low raw materials prices fueled the rise. Moreover, Suominen upgraded FY ’20 outlook in June by changing the wording from clear to significant improvement in comparable EBIT. The update had only a minor impact on our estimates since we changed our FY ’20 EBIT estimate from EUR 23.1m to EUR 24.0m. Perhaps more important was the fact that Suominen removed the previous disclaimer according to which estimating the result for H2 was hard due to the pandemic. It seems Suominen’s strategy is proceeding according to plan and financial performance is on a solid upward trend thanks to strong outlook for value-add end-uses such as household and workplace wipes. With respect to raw materials prices Suominen is unlikely to suffer cost inflation pressure for a while. We see the outlook for pulp prices muted, while the same is only true at best for oil-based inputs polyester and polypropylene. In fact, raw materials prices have developed so soft Suominen faces some negative pressure on nonwovens pricing. We expect gross margin further improved modestly to 12.5% in Q2, and see the figure settling on this level in the short-term.
Recent dollar weakness a (small) negative for top line
The dollar has lately declined by some 5% against the euro, the implication being a negative translation impact on US revenue. We update our estimates to reflect the headwind, which we estimate at some EUR 10m on an annual level. The overall result of our update is that we now estimate Q2 EBIT at EUR 6.8m (previously EUR 6.2m). We now see FY ’20 EBIT at EUR 24.4m.
Multiples are low while figures are on a solid trend up
Suominen trades some 6x EV/EBITDA on our estimates for this year while the multiple for next year is about 5.5x. We view these multiples attractive now that profitability is on a steep improvement path. Our TP is now EUR 4.75 (4.25), remain BUY.
Suominen revised its outlook upwards for the second time this year. We update our estimates; the announcement has only minor impact in quantitative terms but turns us more confident towards Suominen’s sustainable profitability improvement. Our TP is now EUR 4.25 (3.25) and thus we rate the shares BUY (HOLD).
The update reflects conviction in value-add wiping demand
Suominen previously expected comparable FY ‘20 EBIT to improve clearly from ‘19. The updated outlook guides significant improvement. The figure amounted to EUR 8.1m last year, and we now expect Suominen to post EUR 24.0m this year (our previous estimate was EUR 23.1m). In our view the outlook update therefore has somewhat limited information value as such, although it’s worth mentioning that Suominen also removed the previous disclaimer according to which the result estimate for the second half of the year was uncertain due to the pandemic. In other words, the announcement does not change our estimates quantitatively as much as it does qualitatively. Suominen did not comment on market developments, but in our view the update reflects certain value-add wiping product categories’, namely those meant for household and workplace uses, improved prospects due to the pandemic.
Our higher gross margin estimate offsets weaker USD
During the last two months USD has declined by about 5% relative to EUR. We thus update our revenue estimate for this year downwards to EUR 443m from the previous EUR 454m. There have been no meaningful interim changes in raw materials prices, and as we expect value-add wiping product demand to remain brisk we revise our FY ’20 gross margin estimate up by some 50bps to 12.1%. These changes’ net effect on our FY ’20 EBIT estimate is an increase to the tune of EUR 0.9m.
Valuation is attractive as profit recovery gains traction
Suominen currently trades at about 5.7x and 4.8x EV/EBITDA on our estimates for this year and next. In our view higher multiples are now warranted as profitability improvement looks increasingly robust. Our new EUR 4.25 (3.25) TP implies the respective multiples at levels of 6.2x and 5.3x. Suominen is also valued clearly below peer group multiples. We now rate the shares BUY (HOLD).
Suominen’s Q1 revenue only slightly exceeded our estimate but as gross margin improved close to 400bps EBIT came in almost double our estimate. Suominen upgraded FY ’20 EBIT guidance. We have updated our estimates, and our new TP is EUR 3.25 (2.50), rating now HOLD (SELL).
Profitability would have jumped even without the pandemic
Suominen reported flat y/y Q1 revenue at EUR 110.2m, while our estimate was EUR 108.0m. Suominen says its sustainable products sales are developing well (new products contributed more than 25% of sales vs 20% previously). The investment in Green Bay, WI plant helped volumes and contributed to a more favorable i.e. higher quality product mix. The pandemic also began to have a positive effect on volumes towards the end of Q1. Especially cleaning and disinfection applications demand has increased. Nonwovens demand in general has received a boost due to applications like surgical drapes and face masks, however such products represent relatively small business for Suominen. New products, improved production and raw material efficiency as well as low raw material prices together lifted gross margin almost 400bps (we had expected only slight improvement), and thus EBIT amounted to EUR 5.7m vs our EUR 2.9m estimate.
We now expect FY ’20 EBIT at EUR 23m (prev. EUR 12m)
Suominen sees Q2 another strong quarter, and thus updated FY ’20 guidance, now guiding clear EBIT improvement (previously improving) even if there’s much uncertainty with regards to H2’20 as the demand surge induced by the pandemic may cool down. Nonwovens prices will adjust with a few months’ time lag to accommodate changes in raw materials prices. We see some downward pressure on Q2 gross margin due to lower nonwovens prices, expecting a 60bps decline to 11.5%. So far Suominen’s operations have run basically normal. There could be raw material shortages and Suominen or its customers might have to close plants due to the pandemic.
Long-term story receives a boost, yet uncertainty still high
Suominen trades 5x EV/EBITDA and 10x EV/EBIT on our estimates for ‘20. In our view these are attractive levels, yet much depends on the gross margin going forward. Although new products sell well, the size of the pandemic’s positive impact is still hard to gauge. Our TP is now EUR 3.25 (2.50), rating HOLD (SELL).
Suominen reported Q1 revenue slightly above our estimate, while EBIT came in double our estimate. The beat was driven by higher gross margin. Suominen updates its guidance for FY ’20, expecting EBIT to improve clearly (previously improve).
Suominen reports Q1 results on Thu, Apr 23. We have left our estimates unchanged. We expect Suominen to perform relatively well in the current environment, however we don’t see the pandemic producing absolute gains based on current info. Our TP is EUR 2.50 (2.25), rating SELL (HOLD).
Last year was weak for European sales
Suominen’s revenue declined by 5% last year to EUR 411m as the European business lost volumes and sales fell by 13% to EUR 150m. Americas was flat. Product split held steady as baby wipes were the largest group (40%) followed by personal care and home care wipes with about a fifth each. Suominen gives no short-term sales guidance but expects EBIT to improve this year. We estimate Q1 top line to have declined by 2% y/y to EUR 108m assuming volumes have improved a bit while nonwovens prices have declined slightly along with raw materials prices. We still expect Q1 gross margin at 8.5% i.e. marginally up from the 8.3% Q4 figure. We see SGA stable, and thus expect Q1 EBIT at EUR 2.9m (EUR 3.0m a year ago). Assuming stabilizing raw materials prices and gross margins for the rest of the year, we expect FY ’20 revenue up by 3% due to improving volumes. We thus see FY ’20 EBIT at EUR 12.0m vs EUR 8.1m last year.
In our view the pandemic might not inevitably help sales
Relatively speaking Suominen should perform well amid the pandemic, but in terms of absolute gains we don’t see the picture that clear. Suominen’s recent challenges were not due to lack of nonwovens demand, but rather caused by abundance of supply. Also, customer specific considerations matter as the ten largest accounts generate 65% of sales. We see a possibility that the pandemic and its aftermath will help accelerate volume growth, which is what the company needs in order to reach its long-term financial targets. Suominen is reportedly planning to enter face mask production in Finland in co-operation with Ahlstrom-Munksjö, however in our view it’s still early to estimate and value the possible impact on bottom line.
Valuation seems to have gone ahead of itself
In our view the current share price reflects rather hasty assumptions about the pandemic’s impact on the nonwovens market. We see caution warranted as a boost to total volumes is not inevitable. Our TP is now EUR 2.50 (2.25), rating SELL (HOLD).
Suominen’s Q4 results fell short of our expectations as volume pressure continued. We have cut our estimates, our updated TP is EUR 2.25 (2.50), rating still HOLD.
Suominen’s EUR 94.5m Q4 revenue missed our estimate
Suominen’s Q4 revenue declined by 14% y/y and 12% short of our EUR 107.1m estimate. The decline was attributable to volume losses but also to lower prices (due to lower raw materials prices). Volumes were lost in the Americas, with revenue down by 6% to EUR 62m, but the drop was sharp in Europe as Q4 sales slid by 26% y/y to EUR 32m. Suominen’s customer base is concentrated as the ten largest accounts make 65% of sales. Suominen lost volumes last year as the nonwovens price hikes became effective. Suominen says certain customer accounts might still be negatively affected. Suominen reported an 8.3% gross margin in Q4, in line with our estimates. The gross profit was thus EUR 7.8m while we expected EUR 9.0m. SGA, R&D and other items were as expected, and therefore the EUR 1.1m gap in EBIT relative to our estimate (EUR 1.4m vs EUR 2.5m) was due to the low sales figure and resulting weak absolute gross profit.
Short-term growth uncertain, but EBIT should still improve
Although the Q4 sales shortfall was a disappointment relative to our expectations, the softness didn’t fundamentally alter our view towards Suominen’s wider picture as a high level of uncertainty continues to fog the outlook. Suominen doesn’t guide sales outlook for FY ’20 but expects EBIT to further improve from the FY ’19 EUR 8.1m figure. We have cut our estimates for this year. We previously estimated Suominen to achieve 5% top line growth in ’20. We now expect 3% growth. Our expectation for FY ’20 EBIT is now EUR 12.0m (previously EUR 16.1m). Nonwovens demand is expected to grow at a CAGR of more than 4% in the markets where Suominen is present. Suominen targets to grow in excess of this rate in the long-term, however the oversupply problem seems to persist at least in the short-term.
Long-term targets are hard to price in given uncertainty
In our view Suominen’s valuation is neutral considering profitability has just bottomed out. However, it’s hard to say when profitability reaches adequate levels; we retain our cautious stance. Our TP is now EUR 2.25 (2.50), rating HOLD.
Suominen’s top line missed our estimate as Q4 sales declined by 14% y/y due to lower volumes as well as prices. Suominen expects operating profit to improve this year compared to FY ’19 (EUR 8.1m).
Suominen reports Q4 results on Wed, Jan 29. Our estimates stand unchanged. We expect positive FY ’20 guidance given ’19 figures represent a rather soft comparison base. Our TP is now EUR 2.50 (2.25), rating remains HOLD.
Expect a stable Q4 result compared to preceding quarters
We note nonwovens demand unchanged since Q3, and thus leave our estimates intact. We estimate Q4 revenue at EUR 107m i.e. down by few percent y/y due to volume losses. All the nonwovens’ raw materials prices basically flatlined during Q4 and so we expect gross margin stable at 8.4%. We also expect other costs to have remained in control and thus see EBIT at EUR 2.5m (EUR -0.4m a year ago). We see stabilizing prices and volumes helping Suominen to continued improvement with FY ‘20e EBIT at EUR 16.1m (compared to ‘19e EUR 9.2m).
FY ’20 guidance should be positive for both sales and EBIT
Although Suominen’s FY ’19 figures will likely translate to an EBIT twice that of ’18, the company’s profitability is still far off from satisfactory. We thus expect continued meaningful profitability improvement this year. Suominen recently published its new strategy and financial targets for 2020-25. The targets were moderated; Suominen now aims for sales growth above that of the relevant market. As Suominen’s markets grow ca. 3% p.a. we would expect this to imply a CAGR of some 3-5%. In order to reach the targeted above 12% EBITDA margin (which would imply an EBIT margin close to 8%) by ‘25, Suominen not only needs to achieve improved operational efficiency but also robust sales growth. We look forward to Suominen commenting on the outlook for the two currently reported geographies, Europe and Americas, as well as any color on the possible Asia expansion (about which the company has talked over the years). We would also like to hear about turning customer relationships stickier since the nonwovens markets are still well-supplied.
We update our TP but remain HOLD due to uncertainty
Our updated TP is EUR 2.50 (2.25) as peer multiples have gained in recent months. Our rating is still HOLD. Valuation starts to look attractive longer term (‘21e EV/EBITDA ~4.5x and EV/EBIT 10x) yet in our view there’s too much uncertainty. We expect Suominen to declare EUR 0.04 dividend per share for ’19.
Suominen’s Q3 EBIT, at EUR 1.1m, missed our EUR 3.8m estimate by a wide mark. Suominen achieved rather stable volumes compared to our expectations, however this was achieved at the cost of margins. While the soft results were partly due to inventory reductions and reorganization costs, we turn slightly more cautious with respect to margin estimates. Our new TP is EUR 2.25 (2.50), reiterate HOLD.
Suominen sees nonwovens markets largely stable
Suominen posted EUR 103.4m in Q3 revenue (-1% y/y), close to our EUR 104.4m estimate. The figure was helped to the tune of 3% by the strengthening of USD relative to EUR. Volume losses were moderate, the pricing of Suominen’s nonwovens remaining flat. Suominen’s profitability improvement proved modest compared to our expectations as declining raw materials prices and significant inventory reductions during Q3 led to flat pricing. Suominen recorded a 7.4% gross margin, whereas we expected 9.9%. Suominen says the inventory reductions had a EUR 0.5m negative effect on profitability i.e. the gross margin would have amounted to roughly 8% without such reductions. The company says it is now close to the targeted inventory level. Operating profit was further strained by EUR 0.2m items related to the reorganization of business areas, as Suominen now reports business for the areas Americas and Europe. FX had a negative EUR 0.6m effect through raw materials purchases.
We have adjusted our margin estimates downwards
We remain cautious following the report as margin improvement is proving harder than we expected. In order to reach a 5% operating margin, a level where corresponding returns on capital could be deemed adequate, Suominen needs to achieve both improving (or at the minimum flat) volumes and gross margin north of 10%.
Current valuation reflects modest expectations
While Q3 volumes were better than we expected, we see the softness in margins as another source of uncertainty, and thus the steepness of Suominen’s ongoing profit improvement remains clouded. We retain our HOLD rating, our new TP being EUR 2.25 (2.50).
Suominen’s Q3 revenue came close to our expectations. However, gross margin fell clearly short of our estimate and consequently operating profit improved only rather modestly in absolute terms relative to the weak comparison period a year ago. Suominen says cash flow was strong during the quarter due to inventory reductions, however this had a negative effect on the operating result.
Suominen posts Q3 results next week, on Tue, Oct 22. Suominen’s gross margin improved to 9.3% in Q2, and as raw material prices further slipped during Q3 we now expect the company’s gross margin at 9.9% for the quarter. However, we remind Q2 volume losses proved larger than we expected, and thus we retain our cautious view ahead of the report. Our target price remains EUR 2.50, rating HOLD.
Margin improvement story continues to solidify
The prices of key raw materials (i.e. viscose, polyester and pulp) have extended their soft streak during the recent months. European softwood pulp prices declined by more than 10% during Q3, therefore bringing the total price decline for the past year to about 25%. The price trends are roughly similar for viscose and polyester, whereas polypropylene prices have remained stable since spring. Assuming stable pricing for Suominen’s nonwovens, we have consequently made moderate upwards adjustments to our gross margin (and thus EBIT) estimates. We now expect Q3 gross margin at 9.9% (we previously expected 9.2%). This implies an EBIT of EUR 3.8m, or 3.6% operating margin (previously estimated at EUR 3.1m and 3.0%). As the pricing of raw materials registers with a lag of few months, we expect further improvement for Q4, which brings our new EBIT estimate for FY ’19 to EUR 14m (previously EUR 12m).
Q2 volume losses proved a strain on EBIT
While we are confident regarding additional improvement in gross margin, we note volume losses pose a risk for our EBIT estimates. Even though Suominen posted Q2 gross margin above our estimate (9.3% vs our 8.7% estimate), the 15% volume decline in Q2 led to EBIT falling short of our estimate by almost 20%. We expect volume losses to have amounted to 9% in Q3.
In our view valuation is neutral given the uncertainty
Suominen is currently achieving a turnaround in earnings, and trades ca. 20% below peer group multiples on our estimates for ’20 and ’21. Nevertheless, we see the uncertainty due to volume losses posing a risk for our earnings estimates. We therefore reiterate our EUR 2.50 TP and HOLD rating ahead of the report.
Suominen’s Q2 unfolded without surprises in terms of prices and input costs i.e. margins were stable. Yet volume losses were larger than we expected, and thus the EUR 104m in Q2 sales missed our EUR 113m estimate and EBIT fell short. We have revised our estimates slightly down; our TP is now EUR 2.50 (2.85), rating HOLD (BUY).
Margins continued stable, volume losses were larger in Q2
Suominen’s Q2 revenue, at EUR 104m, declined by 6% y/y and missed our estimate by 8%. Strong USD added some 3% y/y, and considering the implemented price increases, we estimate ca. 15% of delivery volumes were lost y/y (we estimate the losses to have amounted to ca. 10% in Q1). We expect Suominen to lose 10% of volumes in ‘19 (expect FY revenue to decline by 1%). We expect stable GM for the rest of ’19, and hence EBIT at EUR 12m. Suominen guides flat revenue and improving EBIT for FY ’19.
Suominen changes its business area structure
Suominen has reorganized its business areas, opting for a geographical split (Americas and Europe) instead of the previous application-based reporting (Convenience and Care). The new structure will be effective from Q3 onwards. Suominen says the new organizational model should further help improve efficiency especially when it comes to optimizing regional capacity utilization. There was scant news about Bethune, although the company said the China-US trade war could potentially help Suominen’s competitive positioning in the US market as Chinese imports are hurt by tariffs. Suominen also noted the EUR 6m capacity improvement investment in its Green Bay, WI, plant will support additional volumes from Q3 onwards. Regarding the European market, Suominen says competition among nonwovens producers remains tight but stable.
Suominen has achieved an earnings turnaround in ’19 as improved pricing and stabilizing raw material costs have led to a clear improvement in gross margin from the lows of ’18, when the margin was hit by significantly higher input costs. The implemented price increases have, however, led to volume losses. Even though profitability has improved lately, we expect FY ’19 EBIT margin at a relatively low 2.9%. Going forward Suominen needs to achieve higher volumes in order to reach further improvement in EBIT margin. Following the Q2 report, we have revised our FY ’19 EBIT estimate down to EUR 12m (previously EUR 13m), while our revenue estimate stands at EUR 425m (EUR 436m). For ’20 we expect further improvement in EBIT margin (3.9%), assuming gradual improvement in delivery volumes.
We wait to see evidence of stabilizing (improving) volumes
Although Suominen’s valuation is not demanding (ca. 6x EV/EBITDA ‘19e vs. 6.5x historically), volume uncertainty still remains. As the price hikes pass through during ‘19, we are waiting to see evidence of stabilizing (and improving) volumes that would lead to further EBIT improvement in ‘20. We lower our TP to EUR 2.50 (2.85) due to volume uncertainty, and thus our rating is now HOLD (BUY).
Suominen reported Q2 results with revenue missing our estimate by 8%. However, the company managed a 9.3% gross margin, which was clearly above our 8.7% estimate. At first glance we see no major surprises in the sense that margins have stabilized at higher levels, yet significant nonwovens delivery volumes were also lost. Suominen also reorganized its business areas into a new geographical reporting structure (Americas and Europe).
Suominen reports Q2 results next week, on Wed, Aug 7. In Q1 the company’s gross margin improved to 8.1% (compared to the 6.2% low in Q4’18) as raw material costs remained stable and price hikes came into effect. We expect the gross margin improvement trend to continue throughout 2019, but the main question concerns volume losses following price hikes. We leave our previous estimates unchanged for now. Our target price still stands at EUR 2.85 per share; our new rating is BUY (HOLD).
Volume declines in focus following the hiking of prices
In our view Suominen’s declining earnings trend bottomed out in Q1 as price hikes and stabilizing raw material costs drove improvement in gross margin. Q1’19 gross margin stood at 8.1%; we expect Q2 gross margin at 8.7%. However, the company lost significant delivery volumes. We estimate Suominen’s delivery volume losses amounted to some 9% in Q1; we expect losses of similar magnitude for the remainder of 2019. Our expectation for Q2 is EUR 113m in revenue and EUR 3.3m in EBIT.
Expect flat input costs and price hikes to lift ‘19e earnings
While the EURUSD exchange rate has remained steady during the last three months, European softwood pulp prices have declined further, by about 10%. The development is beneficial from Suominen’s point of view, softwood pulp being a key nonwovens raw material. Meanwhile polypropylene prices have increased by a roughly similar percentage. According to Lenzing, viscose and polyester prices remained stable during spring (development until Apr 15). All in all, raw material costs have been flat. We expect ‘19e revenue at EUR 436m and EBIT at EUR 13.3m, assuming stable input costs for the remainder of the year.
We leave our estimates intact ahead of the report
Suominen is valued at ca. 6.0x EV/EBITDA ‘19e (on our estimates) vs historical average of 6.5x. Suominen’s peer group multiples have gained during the last three months, and although there is still uncertainty concerning delivery volumes, we consider the current valuation undemanding. We retain our TP of EUR 2.85 per share, and thus our updated rating is BUY (HOLD).
Suominen has disappointed expectations several quarters in a row. The company now posted EUR 3.0m Q1 EBIT, a figure clearly above our EUR 2.0m estimate. The earnings beat was driven by improved gross margin; the product of price hikes and stabilizing raw materials costs. Volume outlook is still uncertain, yet in our view Suominen’s earnings have now bottomed out. We increase our target price to EUR 2.85 (2.40) per share, while retaining our HOLD rating.
2019 volume outlook remains uncertain
The company has managed to improve its gross margin through price hikes, however this has meant losing volumes. We expected the company to lose Q1 volumes by around 5% y/y. Therefore the 9% Q1 volume decline we estimate from the disclosed figures came as a negative surprise. We had previously expected volume declines of around 8% for the remaining quarters of 2019, while estimating 7% volume decline for the whole year. We now expect 2019 volumes to decline by 9%.
History suggests 11-12% gross margin potential
Suominen achieved an 8.1% Q1 gross margin (vs. our 7.0% expectation and 7.4% a year ago). The GM had previously touched the low of 6.2% in Q4’18. We expect the 2019 GM to improve to 8.7% as higher prices continue to pass through. We estimate Suominen to reach a roughly 11% GM by 2021 as the recent years’ oversupply situation balances out. According to our analysis, this would imply an EBIT margin of ca. 5% in 2021E.
We increase our target price to EUR 2.85 per share
We expect Suominen to reach 3.1% EBIT margin in 2019, while estimating further margin upside to the tune of 200bps by 2021 on the back of stabilizing nonwovens market. In our view a 5% EBIT margin is a reasonable assumption in a long-term valuation context. However, given the company’s recent challenges we are not yet ready to fully weight this long-term potential in our TP. We do note that the 5% margin assumption would justify a share price materially above EUR 3 per share. Suominen now trades at 6.1x EV/EBITDA ‘19e, a 20% discount to peer multiples.
Suominen posted Q1 adj. EBIT, at EUR 3.0m (vs. our EUR 2.0m estimate), substantially above our expectations. The company’s gross profit (and margin) improved due to higher prices and stabilizing input costs. Volumes were lost, yet the results point to Suominen having achieved a turnaround in earnings.
Suominen reports Q1 results next week, on Wed, Apr 24. Q4 proved another miss in a long series, however there are tentative signs pointing to earnings having bottomed out. The company has hiked prices since last autumn (although volumes are likely to be lost as a result), and raw materials pricing pressure has become a less acute problem with all the major inputs registering double-digit price declines during the last six months.
Focus will be on the gross margin and volume dynamics
Gross margin continued to decline in Q4, hitting a low of 6.2%. We expect the Q1 gross margin at 7.0% (vs 7.4% a year ago). With the onset of nonwovens price hikes and recent declines in raw materials prices the gross margin is bound to increase, yet it is hard to say to what extent volumes might have been lost. We are forecasting 5% y/y volume decline for Q1. We expect Q1 revenue at EUR 116m (8% y/y increase) and adj. EBIT at EUR 2.0m, or 1.8% margin (vs EUR 1.5m and 1.5% a year ago). Our forecast could be topped on the gross margin level as input prices have been weaker than expected. However, we leave our operative estimates unchanged as the gross margin positives and volume negatives should cancel each other out on the absolute gross profit level.
First quarter with the new CEO behind the wheel
Mr. Petri Helsky (previously CEO of Metsä Tissue) has held the seat as Suominen’s President & CEO since Jan 7. Suominen guides flat revenue and improving adj. EBIT for 2019. We expect 2019 revenue to increase by 3% (mostly due to FX), and EBIT at EUR 12.5m (EUR 4.6m) as gross profit is set to improve.
Estimates remain largely intact, FX basically flat
We retain our HOLD rating and target price of EUR 2.40 per share ahead of the Q1 report. We stay cautious for now despite expected gross margin improvement as it is unclear how much volume might be lost. Peer group multiples have gained sharply in recent months, meaning there is solid upside potential should Suominen manage to turn around earnings trajectory in 2019.
Suominen has faced clear challenges in recent years and there is way to go to reach the historical earnings level. Own efforts and Bethune’s improving outlook support the outlook for earnings gradually turning to the better. Valuation on 2019E multiples looks moderate, but evidence of earnings turning remains to be delivered. We retain “Hold” rating for Suominen’s shares.
Business has suffered in recent years
Capacity increases by competitors in certain product areas have had a clear negative impact on Suominen’s business in 2016, 2017 and H1’18. Particularly price/mix and profitability have been key issues. Suominen addresses these via its 3P program. Some early results were delivered in H1’18. Bethune’s increasing contribution should help in gradually turning price/mix to the better. We expect earnings in 2018E to remain modest, in line with guidance, but expect earnings to gradually improve in 2019-2020E, driven by both Bethune and Suominen ex-Bethune.
Bethune’s outlook seems to be finally improving
After a lengthy period of ramp-up troubles, Suominen’s new production line in Bethune finally reached positive gross profit towards the end of Q2’18. Management indicated production volumes in July 2018 were good, which improves outlook for a gradual turn finally taking place. We expect Bethune to have a more significant topline impact from H2’18 and its gross profit contribution to turn to positive in H2’18.
Waiting for earnings to turn - “Hold” reiterated
Suominen’s valuation looks unattractive with 2018E multiples, but on 2019E multiples valuation looks much more moderate: on our 2019E estimates Suominen trades 5.4x EV/EBITDA, 10.3x EV/EBIT and 13.1x P/E, which are close to Suominen’s historical multiples. While valuation does not look particularly challenging on 2019E estimates, evidence of earnings turning to better is needed to justify material upside. With 2019E multiples close to historical valuation we keep “Hold” rating intact with target price of EUR 3.4 (3.5). If Suominen was to move towards its financial targets, there would be clear upside to valuation.
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Suominen expects comparable EBITDA to increase in 2023 compared to 2022 (EUR 15.3m)
2020-2025 strategic financial targets include revenue growth above market rate, above 12% EBITDA margin by 2025, and gearing in the 40-80% range
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