Suominen - Long-term story gains more ground

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).

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