Suominen - More volumes and margins needed
Suominen reports Q3 results on Nov 6. The company has shown some early signs of recovery, but a lot more positive needs to be seen from the volume and margin side.
The wiping customer market should continue to stabilize
Suominen’s EUR 5.0m Q2 EBITDA improved y/y but remained flat relative to the preceding quarters, and hence there should still be a lot of catch-up potential going forward. Volumes have already recovered a bit, but not nearly enough to reach desired capacity utilization rates. The wiping customer market has been challenging in the past couple of years from the perspective of volumes; the environment is normalizing and the market could return to sustained volume-growth soon (as opposed to the recent inflationary environment where volumes dropped), although the Q3 report of Kimberly-Clark showed some disappointing volume development after more encouraging results earlier this year. We however find Suominen’s earnings recovery has lately lagged that of e.g. Fibertex Nonwovens and the Spunlace division of Glatfelter. In our view Suominen’s earnings recovery should continue in H2 even if the overall market situation is yet not too favorable, albeit still improving.
Volume recovery remains the most important theme
Suominen should have potential for further H2 margin recovery, even without large volume gains, as raw materials prices have again declined. We estimate key raw materials prices to have declined by 5% q/q in Q3, which favors H2 sales margins as nonwovens prices are yet to follow down after the raw materials price lift in H1. We estimate 12% y/y Q3 revenue growth, driven by volume and price gains. We expect Q3 gross margin to recover by 150-200bps q/q and EBITDA at EUR 7.9m, which would be a gain of ca. EUR 3m y/y and q/q. The level would still fall short of potential, as we believe an annual EBITDA of roughly EUR 40m should be possible in a more favorable market.
Earnings are expected to recover more towards next year
H1 figures remained soft, but we believe H2 shows more gains towards an annual run-rate of about EUR 40m EBITDA (or EUR 20m EBIT). On this basis Suominen is valued around 8x EV/EBIT on our FY’25 estimates, which isn’t that low considering the uncertainty around margin recovery yet down from the 23x level for this year. We retain our EUR 2.5 TP and HOLD rating.