Segezha Valuation Set To Spike As It Consolidates Russian Forest Products Sector

• A deal between Segezha Group and Murat Aliev’s Bonum Capital will see the former expand its resource base by half again.
• When the deal is concluded, Segezha is set to become Russia’s biggest player in the forest products sector. Valuation is set to double in the mid-term as the company catches up with global peers.
• The post-pandemic macroeconomic environment seems favorable for Segezha’s business model, which includes high exports and self-sufficiency.

The past year has been a successful one for Russian IPOs. Shares of all the Russian companies which went public this year have grown since their floatation, with the sole exception of Fix Price. It’s unsurprising, then, that investors are keeping an especially close eye on the newcomers.

Segezha Group’s offering in April this year SGZH led to the first appearance of a forestry major on the Moscow bourse for a long time. Forests are as abundant as oil or gas in Russia, which is home to 20% of the world’s reserves of forests (although it currently accounts for a much smaller proportion of the global forest products market).

Resource-rich

Segezha Group’s competitive advantages include low production costs, high-quality assets, and an effective management structure. Of particular importance for long-term strategic investors, though, is Segezha’s resource base. The company is making a particular effort to strengthen this area, announcing today that it acquired 100% of holding company Inter Forest Rus in a deal with investment group Bonum Capital. Inter Forest Rus is a Siberian company with extensive resources and manufacturing assets, valued at $515 million including debt, which comes to around $280 million. Separately, Bonum Capital is also increasing its stake in Segezha Group from 4.6% to around 13.3%, making it a significant partner and shareholder. Bonum Capital has a history in the forest products market, investing in assets and participating in Segezha Group’s IPO.

As a result of the deal, Segezha Group is set to become the largest sawn timber producer in Russia, and the second largest in Europe. It will also join the list of top 10 largest global players in the sector. Inter Forest Rus’ projected 2021 EBITDA is $152m, which, alongside Segezha’s projected 2021 total, makes a combined EBITDA of $539m. Their combined equity value will total $1,898m. The market is notable for its export potential as well as its ecological utility, which can be particularly attractive to ESG funds when managed correctly. Inter Forest Rus’ main export markets include China, Japan, the EU, and Egypt. 70% of Segezha’s products, meanwhile, are exported, with particular demand coming from industries such as construction, retail, and cement.

(Image source: company presentation on Inter Forest Rus M&A)

A post-pandemic growth spurt

The revival of the world economy, coupled with the soft monetary policy of the world’s leading central banks, should foster a propitious environment in the forest products market. And the increase of Segezha’s resource base is a serious statement of intent for the long-term growth of capitalization.

The combined company should have an advantage in terms of economies of scale, bringing manufacturing prices down well below that of its peers. It will also become one of the leading leaseholders of forest reserves globally with 16 million hectares under management. This will allow Segezha a crucial high level of self-sufficiency in its key raw input material, with insulation against fluctuations in global raw materials fluctuations – an invaluable strength in a post-pandemic global economy characterized by decoupling and logistical chaos. The group will also move closer to the growing Asian markets as a result of the deal, including China, where the construction industry is currently seeing demand for resources increase.

The deal is well-timed, likely to profit from a renewed focus on the development of Siberian cities. The Russian government aims to create 3-5 new cities with a population under 1m by 2030, as well as reconstructing the Trans-Siberian Railway and the Baikal-Amur Mainline. Segezha Group currently has an EV/EBITDA multiple of 5.8, while the median EV to expected 2021 EBITDA multiple among international peers is 7.4 TR 6 October), and Segezha’s closest peer – Mondi – has a multiple of 8.6. The valuation of the combined companies will be in the region of 4.0xEV/EBITDA (with capitalized leasing), according to a report by VTB Capital. An additional strategic advantage for the company lies in the ability to trade carbon credits in the future, since the forest industry, unlike the mining industry, produces oxygen and consumes carbon dioxide through the repeated use and renewal of forests.

(Image source: company presentation on Inter Forest Rus M&A)

Market overview

The global market for forest products was hit hard by COVID-19 as a wave of lockdowns caused rapid deceleration in economic activity, but the sector is staging a rapid recovery in step with the global economy. Demand has been recovering quickly throughout 2021, with prices rising as the necessity for single-use plastic substitution and e-commerce growth give the industry a boost. Other big players in the market include North American companies like Weyerhaeuser and Westrock, as well as some large European players like Stora Enso and Holmen.

Risks

Among the risks for the strategic investor, it’s worth noting the potential for increased state regulation and the introduction of higher excises in Russia. The introduction of China to Segezha’s list of export markets also raises the question of whether trade wars could influence demand, while the expansion of the company’s export markets generally risks exposing it to exchange rate fluctuations. Another possible risk is a deterioration in the price of the sector due to macroeconomic slowdown. So far, however, this final risk seems slim as the world economy accelerates out of the pandemic.

From small acorns…

I have been following Segezha since the company’s successful IPO in April, and it strikes me as a strong alternative to global timber and forestry ETFs for the growth investor with a long-term horizon. This M&A represents a start to the growth promised by the company at its offering (it could hardly achieve its long-term aim of becoming fifth-largest global forest producer with a single base in Karelia). The combination of strong fundamentals and an underutilized local market (Russia has just a 4% share in the global forestry market, according to the UN) could be precisely the environment needed for this particular sapling to rise above the canopy of its global peers.