Suominen’s financial statement release for last year was just published. Q4 results fell short of forecasts as sales slumped (volumes and sales prices depressed by raw materials) worse than expected at the end of the year. The dividend forecast of 0.05 euros exceeded expectations. For 2020, the company only guided for an improvement in results compared to 2019, while Suominen did not provide revenue guidance this year. Considering last year’s subdued starting level and the significant role of our view on revenue in the company’s earnings turnaround coefficient, we believe the guidance was somewhat disappointing.
Suominen’s Q1 was good, and otherwise, the company’s situation finally looks better! Today, I also published a comprehensive report on Suominen, where the situation has been reviewed in more detail. The report is freely available for everyone to read. In addition, Verneri and I also made a video about Suominen, where the comprehensive report and Suominen are opened up in a lighter format.
I believe I fixed that in the report on our own service, but I probably can’t edit the Kauppalehti (Finnish financial newspaper) version. However, the report is only about Finland, so that erroneous name has no practical significance.
The company indeed issued its second profit warning yesterday, so the upward trend has continued during Q2. I still don’t think the stock is too expensive. More detailed comments will be in the morning report.
Non-woven fabric manufacturer Suominen’s stock appears to be a buy. Suominen’s message, conveyed to investors, is that the strategy implementation and results are picking up speed. The demand for products made from the company’s fabrics is strong, driving record results. Volumes are growing as the pandemic accelerates the sales of wiping products. Material suitable for respirators is also being sold. Capacity and profit are growing “significantly”. The average target price for the stock, which has rallied over one hundred percent this year, is 5.45 euros, while the current quotation is 4.85 euros.
Suominen’s preview is out this morning. We expect strong Q3 results, although there have probably not been enough ingredients for a fireworks display like Q2.
An interesting piece of news from this morning’s news flow was that cardboard company Billerud reported a weakening in demand for the Medical & Hygiene segment, and Essity’s Personal Care revenue decreased compared to the reference period (although profit improved slightly due to lower raw material costs). I don’t have time to investigate the more detailed reasons now, but these are not necessarily particularly good news for Suominen, even though neither is a direct competitor or even really a peer for Suominen.
Another great quarter for Suominen. Strong demand continued due to the pandemic, and the gross margin reached a new record. Robust cash flow. The festivities also seem to continue at least until the beginning of next year, so Suominen is likely to see a clearly positive stock reaction today.
The target price didn’t even go up for Inderes, even though Q3 results were more than twice as good as expected, quite something. Should it switch to the SaaS industry?
Well, I really can’t understand this analysis at all now. Quarterly EPS is more than double compared to estimates. Full-year EPS is already at Inderes’ estimated full-year level at this point in the year. The company itself estimates the outlook for the rest of the year and at least the beginning of next year to be very good. Despite this, the target price is kept the same, and future estimates do not in any way take into account the current strong results and significantly improved operational efficiency and capacity. Somehow, it feels like the old burdens of the past weigh too heavily on this turnaround company as well, and this significant turnaround in results is seen only as some kind of one-off stroke of luck for one year. I personally believe that the world has permanently changed favorably for Suominen, and there will be continuously growing demand for Suominen’s products in the future.
Thanks everyone for the feedback! I humbly accept it.
Time will, of course, tell in which direction the world changes, but experience has shown that in competitive businesses, it’s wise to remain calm and not extrapolate the continuation of peak results indefinitely. Concrete examples that come to mind without much thought include the pulp price rally in 2017-2018, Finnair’s ascent in 2017, and Outokumpu’s ferrochrome spike in 2016 (or 2017). I don’t believe that the current market conditions (demand, raw material price levels) for Suominen will continue indefinitely; normalization will occur either through demand normalization or, at the latest, through an increase in supply (in current market conditions, a nonwoven company’s capital generates such good returns that investments will accelerate and competition will intensify over time if the situation is the new normal). This may, of course, take time, which would be good for the company, as cash flow is rolling in rapidly under these conditions.
Our forecasts for 2021-2023 also expect the company’s highest results in history, excluding 2020 figures. Profitability forecasts are also close to the company’s target level, for which there is not yet much evidence of systematic achievement. Therefore, I don’t consider expectations particularly low. The target price has also risen by over a hundred percent this year, and the most important thing, the recommendation, is still positive.
Despite my forecasts or target price, Suominen’s share price will also surely follow sooner or later if churning out eight-figure quarterly operating profits becomes a habit. Thus, I don’t see any major cause for concern for shareholders at the moment.
Yes, I also agree with these analyses. Perhaps what confuses me, as well as other Inderes followers and those who have invested in Suominen, is that this analysis and assessment of Suominen’s future outlook comes after the company has achieved a significantly better result than your own estimate and now assesses the near-term prospects to be even better than before. If you arrived at the previous target price after the last interim report and when you anticipated the rest of the year and the near-term outlook then, it’s difficult to understand why there wouldn’t be positive changes to this view when the concrete result on paper and the company’s own assessment improve further. I understand the caution in estimates and the need for a somewhat longer track record in a turnaround and in generating results, but now it feels like the latest assessment focuses only on possible negative scenarios that might put pressure on profitability. Am I the only one who believes that even if the coronavirus recedes, face masks, for example, will become more common in the future, even in the northern hemisphere, and unfortunately, this will not be the last epidemic we face? And even if the former generates more competition, there is an increasing demand for high-quality and ecological wiping, hygiene, and healthcare products, and even a market leader still has the opportunity to grow its markets. Either generically or why not through acquisitions. Unless some party takes this company off the stock exchange before the turnaround and its current profitability and potential are more fully realized in its valuation. The fact that the share price and target price have already risen by 100% this year hopefully doesn’t mean they can’t rise further if, and when, as you yourself point out, the valuation is still down-to-earth in light of new results. Evli even sees the valuation level as attractive and raised the target price to 6 euros, so the general consensus at this point is probably 5.4-6.0. I’ll keep my own target price a secret, but you’re absolutely right that at current market prices, I personally don’t see much concern for impairment, especially since Suominen is a nice stock at the moment in that otherwise negative corona news actually benefits Suominen’s owner to some extent.
However, the impact of forecast changes for a few quarters or years on the fair value of a stock is limited (for better or worse), if the view on long-term cash flow generation capacity does not change at the same pace as short-term forecasts (cf. e.g. DCF model, which has years from now to eternity). Setting a target price is also not an exact science; for us, the most important starting point is the risk-adjusted expected return of the stock. As a conclusion of yesterday’s analysis, I assessed Suominen’s expected return as attractive, which is why the recommendation remained at “add,” but I did not adjust the target price marginally upwards despite the forecast changes. For the reasons mentioned above, I did not see the expected return as very good, which is why the recommendation did not rise to “buy” (we have a four-tier scale and a different recommendation policy, which should be considered when comparing recommendations). In this scenario, the target price should, of course, have risen for the recommendation and target price to be in line. As can be inferred from the text of the analysis, the recommendation would be at “buy” based on valuation, if my neutral scenario were that eight-digit quarterly operating profits are the new permanent normal level for Suominen in the long run (i.e., the expected return would be very good).
By the way, I made our entire Q3 report on Suominen freely available to everyone, if anyone is interested in taking a look. As a general comment, I warmly recommend giving weight to the text and justifications in the analysis, especially instead of the recommendation and target price. Heikkilä&Vilen also had an episode on this topic. The comprehensive report on Suominen published early this summer is also still relevant and it goes through some of the dynamics of the non-woven fabric market, which has sometimes been quite challenging.
Of course not. At the same time, however, I try to keep a broad perspective, consider the big picture, and give only a reasonable weight to individual years. I followed the same logic in 2019, when Suominen’s net profit was at a loss.
The CEO also pondered this in the video. I kept thinking that due to the pandemic, capacity will also likely increase. Thus, after the pandemic, if demand remains higher than the baseline (which I consider quite possible), it doesn’t necessarily mean that margins will stay, but increased capacity might unpleasantly bite into margins as overall demand still decreases from the current pandemic level.
That’s entirely possible; many things can negatively affect margins in the long run compared to the current exceptional situation. On the other hand, the current strong cash flow and the resulting increase in capital will certainly open up opportunities for additional investments. By this, I mean investments that do not necessarily increase capacity but lower costs. Or they provide additional resources to seek entirely new markets, either regionally or through new innovations and product categories, as Suominen has already done during the pandemic. As long as demand remains higher than the pre-corona baseline, and the momentary, significantly higher-than-baseline “stroke of luck” has boosted cash reserves well, I personally believe there is potential for long-term and steady sustainable growth in the future. No one certainly wishes for such an exceptional situation in the future, and hopefully the current pandemic will not last for years, but as I said, I also don’t believe there will be a complete return to the old ways. At the beginning of the pandemic, it was also seen that even authorities had to resort to somewhat exceptional channels for healthcare products, and the outcome was unusable second-rate products worth millions. I would like to believe that lessons have been learned from these mistakes, and that the demand, which has decreased from the pandemic’s peak levels, would hit the less qualitative and reliable producers more. For products that meet quality standards and are more ecological, on the other hand, permanently increased markets would remain as the whole world wants to be better prepared.
Lest anyone get the wrong idea, Suominen under its current management has indeed done many right things regarding production efficiency, sales, and the launch of new products, and results would likely have improved significantly this year even without corona. These have also been discussed in more detail in the extensive report.
It’s worth highlighting separately that the share of new products in revenue, over 25%, is a really strong figure. Few, if any, comparable listed companies in Helsinki have that figure at the same level. Typically, the margins of new products are higher than old ones, so this certainly reflects clearly in the gross margin.
edit: It’s quite difficult to assess the sustainability of the gross margin, as the company doesn’t really open up or comment on the strength of the many different factors affecting the margin. This, of course, increases risks (i.e., weighs down the acceptable valuation). Surely the company has a business-critical reason for this, so we’ll probably have to make do with this in the future.
Berry Plastics, which partly competes with Suominen, published its Q4 2020 results (different financial year) last week. Berry’s segment most relevant to Suominen (though by no means directly comparable), Health, Hygiene, and Specialties, grew its volumes by 12% and adjusted EBITDA by 37% in the last financial year, as a favorable product mix and improved productivity supported profitability.
Berry also guided for the entire group, which includes a significant amount of business completely irrelevant to Suominen, for 2% organic volume growth and stable or marginally improving adjusted EBITDA. However, from Suominen’s perspective, it was interesting that, according to an analyst report by Bloomberg, one reason for the slightly cautious guidance compared to expectations was the anticipated weakening product mix in the HH&S segment due to the calming of the pandemic (vaccine). However, we have not forecasted earnings improvements for Suominen for next year from this year’s peak level, so vaccine news has not yet caused pressure for changes in forecasts. Raw material prices have also edged up recently as the vaccine brightened the long-term economic outlook.
The end of this year and the beginning of next year are likely to be strong for Suominen. Also, in my opinion, the stock does not price in continued earnings improvements year after year, as was already mentioned above.
An interesting company otherwise 
