BLRDY - Billerud: A Food Packaging Company At Just 9x The Underlying Free Cash Flow

2023-04-29 11:35:00 ET

Summary

• Billerud is a large player in the cardboard packaging for liquid foods and drinks.
• 2022 was a great year, but even after taking a 25% lower EBITDA into account for this year, 2023 will be fine as well.
• I expect to see an underlying free cash flow result of in excess of 11 SEK per share.
• The stock is currently still trading with the 7.5 SEK dividend attached. Billerud will go ex-dividend at the end of May.

Introduction

The North American financial markets got to know Billerud (BLRDY) in 2021 when it launched a buyout offer on Verso Corp . This transaction was widely covered on Seeking Alpha and the deal closed in the first half of last year. As Billerud is incorporating Verso into its own corporate structure, I was looking forward to seeing the company's 2022 results as that was a strong year for packaging giants. 2023 will likely be weaker than 2022 but Billerud is in an excellent position to deal with softening markets.

Billerud is a Swedish company and it shouldn't be a surprise to see the Swedish listing in Stockholm where the company is trading with BILL as its ticker symbol , is the most liquid listing. The average daily volume in Sweden exceeds 600,000 shares per day resulting in a monetary value of in excess of 60M SEK or around 6M USD using the current exchange rate. As Billerud reports its financial results in SEK, I will use the Swedish Krona as base currency throughout this article. There are just over 248M shares outstanding resulting in a current market capitalization of approximately 24.8B SEK (which is roughly 2.4B USD).

2022 was a good year, but 2023 will be tougher

Billerud experienced tailwinds in 2022 as the demand for its packaging solutions soared. After completing the acquisition of Verso last year, it's quite likely everyone in North America and Europe has (unknowingly) had some of Billerud's products in their hands. About 40% of the total revenue is generated in the foods & drinks segment and that generally is a very resilient segment.

Billerud actually has a leading position in the LPB segment ('Liquid packaging Board') and has strong positions in the better known cartonboard and containerboard in Europe.

The total revenue in 2022 increased to 42.6B SEK (this includes the contribution of the Verso acquisition for just three quarters). The operating profit generated on this revenue was approximately 5.7B SEK but keep in mind this includes approximately 135M SEK in expenses related to the Verso acquisition. Those expenses should be non-recurring.

Billerud reported a pre-tax income of 5.9B SEK thanks to a net finance income of 186M SEK. That's perhaps surprising considering the Verso acquisition was an all-cash deal but the footnote shows the positive impact of FX changes cancelled out the higher interest expenses.

The net income came in at 4.6B SEK which resulted in an EPS of 20 SEK according to Billerud. Keep in mind this includes the likely non-recurring FX changes but is also based on the weighted average share count of approximately 228 million shares. Billerud completed a rights issue in the second quarter of last year and that's why the weighted average share count is lower than the current share count of in excess of 248M shares. The adjusted EPS would be approximately 18.5 SEK.

Billerud reported a total operating cash flow of 7.9B SEK but you immediately notice the cash taxes paid were just 453M SEK although the income statement shows in excess of 1.25B SEK is due. Adjusting the operating cash flow for this 830M SEK difference and after also deducting the 177M SEK in anticipated lease payments, the underlying operating cash flow before changes in the working capital was actually 6.9B SEK.

We also see the total capex was 3.3B SEK but this includes the 1.1B SEK spent on a new recovery boiler at one of its plants . This will allow the company to decommission the old, 1969 built boiler and increase its production capacity while also meeting all environmental standards. The sustaining capex (excluding these growth and strategic investments) is roughly 2B SEK which means the underlying free cash flow result of Billerud is approximately 4.9B SEK or 19.7 SEK per share. This has helped the company to rapidly digest the Verso acquisition as the net debt remained stable in 2022 despite completing a $800M+ acquisition of which only $350M was funded using the rights issue.

The free cash flow result is impressive and it means the stock is trading at just 5 times the free cash flow of 2022. Of course, we have to have a forward-looking approach and Billerud is warning for a weaker 2023.

Billerud has not provided an EBITDA guidance but we should for sure expect a substantial decrease, despite having an additional quarter of contribution from the Verso acquisition and seeing the start of an efficiency program in Europe which should have a positive impact of 400M SEK on the EBITDA. The sustaining capex this year will be approximately 2.2B SEK .

If I would now assume a 25% EBITDA decrease to 6B EUR and a 2.5B SEK depreciation, the EBIT comes in at 3.5B SEK. Assuming an increase of the average cost of debt to 3% (this will continue to increase in the next few years as existing debt will have to be refinanced) and assuming an average tax rate of 22%, the net income comes in at 2.6B SEK and the sustaining free cash flow should approach 2.8B SEK.

Investment thesis

This means that even after taking a 25% EBITDA decrease into consideration, the EPS and sustaining FCFPS will still come in at 10.5 SEK and 11.3 SEK per share respectively. This should also mean Billerud can easily fund the remaining capex for the new boiler and any other strategic capex using the incoming cash flows despite providing a generous dividend of 7.5 SEK per share over the strong 2022 results. Important: the stock is currently trading cum dividend: the anticipated ex-dividend date is May 26 and the dividend will be payable on May 31st. The standard dividend withholding tax in Sweden is 30%.

So while 2023 will likely be worse than 2022, it shouldn't be a disastrous year. We'll know more after the first semester when I can finetune my EBITDA expectations but I am pretty confident in Billerud's future.

I currently have no position in Billerud but I may start to look for an initial long position as the current 11% free cash flow yield in combination with a strong balance sheet (less than 0.4x the 2022 EBITDA and likely less than 0.6 times my anticipated 2023 EBITDA) makes the stock very appealing at the current level.

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