Spanish Small & Midcaps: Iberpapel

iberpapel

Grupo Iberpapel Gestión (IBG) is one of the key players in the printing and writing paper market in Spain. The group’s productive process is very highly integrated: its business encompasses the whole process of paper manufacturing, including forest activity, cellulose and paper production, electricity generation and commercial activity.

The forestry division is present in Spain, Uruguay and Argentina and is run by 5 Argentine, 2 Uruguayan and one Spanish company. They manage a total of 25,000 acres of woodland, which guarantees nearly 30% of the supply of eucalipytus wood used to manufacture pulp. This way Grupo Iberpapel can avoid total interruptions in supply and reduce operating risks. It is committed to sustainable practices for the environment, such as reforestation and soil regeneration.

The industrial division is the most important one in the group. All its business is handled by one company set up in 1935: Papelera Guipuzcoana de Zicuñaga, based in Hernani. This location consists of two plants: one for cellulose, with a production capacity of 185.000 Tn/year of eucalyptus cellulose paste, and the other for paper. The paper plant has a production capacity of 250.000 Tn/year (they need to buy white paste from third parties when the need for cellulose paste exceeds the amount produced at the plant).

Papelera G. de Zicuñaga also has a cogeneration plant and a biomass plant, which produces electricity (over 550.000 Mw/h) and thermal power (120.000 Tn/h of steam). This guarantees the use of clean energy, as well as the optimisation of energy consumption, apart from selling the residual supply to the network. The company consumes 22% of the electricity produced.

Apart from these two divisions, there is also the commercial arm which guarantees to sell 100% of group production.

There are various factors worth highlighting about Grupo Iberpapel:

  1. Strong cash flow; the company continues to build up cash. Given its huge capacity for generating cash, the company accumulated an amount equivalent to 25% of its market capitalisation at the end of the first half.
  2. Capital investment (capex). investments in energy are on hold until there is a more stable and predictable regulatory framework, particularly for renewables. There is talk of investment, firstly to increase installed cellulose pulp capacity, which would then be followed by an investment in a new paper machine. This would allow for more diversification in the final product towards lines with bigger margins.
  3. The absence of debt: strong cash flow and a conservative investment strategy (low capex) mean the group does not have any debt. So the risk of it being involved in problems arising from insolvency or a lack of liquidity is completely reduced.
  4. Vertical integration:  encompassing the forestry activity and pulp production provides a natural way of hedging against the risk of deprovisioning of wood or pulp, or against a sudden sharp rise in the price of wood or pulp.

Furthermore, the integration strategy supposedly has also diversified towards electricity and thermal power via cogeneration, allowing the company to turn a cost into revenue, as well as guarantee efficient and sustainable energy consumption.

5. Good commercial positioning: a commercial network which is diversified in Europe and north Africa. Long-term contractual relationships with its clients, which reward their loyality, allowing for production on request which significantly cuts the cost of warehousing stock.

Risks to the business include a possible decline in the price of paper and electricity. It should also be taken into account that this is a very concentrated activity. The sale of paper still accounts for 80% of the group’s revenues, despite its diversification towards the energy business and the sale of wood. And it only has one factory, which means that if there is any incident interrupting production there, then group production would be completely halted. We should also not forget that Iberpapel is a small-scale business, with a low level of market capitalisation which makes it more illiquid.

In conclusion, we like Iberpapel because of its high level of vertical integration and its healthy financial situation. It generates a lot of cash and has no debt.