UPM

UPM, a Finnish pulp and paper company, calls itself "The Biofore Company". I'm not particularly keen on pulp and paper industry as such, but UPM is much more than #1 producer of graphic paper in the world and a leading producer of chemical pulp: it has substantial forest land holdings and it is a significant generator of low emission energy.

UPM owns 43.09% of "Pohjolan Voima" (PVO) which in turn owns 58.39% of "Teollisuuden Voima" (TVO). TVO operates two nuclear plants in Olkiluoto, Finland and is building a third reactor there. They have also secured permit to build a fourth one! In addition to this PVO has a portfolio of hydropower and condensing power plants. UPM also directly owns hydropower and combined heat and power plants (CHP). At the end of 2010, UPM controlled 2959 MW of nominal power generation capacity

UPM owns 900,000 hectares of forest in Finland (1 hectare = 2.47 acres), 7,000 hectares in UK and 76,000 hectares in USA. UPM’s eucalyptus plantation company Forestal Oriental, that is an integral part of the Fray Bentos pulp mill in Uruguay, owns 200,000 hectares of eucalyptus plantations.

One interesting future project within UPM is BTL-biodiesel (BTL = biomass-to-liquid). The raw material used in the production of advanced biofuels would mainly consist of energy wood: logging residues, wood chips, stumps and bark. The company is also investigating bioethanol and bio oil. All of UPM’s biofuels will be based on non-food raw materials.

The operating profit/loss of the company will be determined for a long time by pulp and paper segments (FY2010 +577 million euros and -254 million euros respectively). Energy is the stabilizing segment with significant operating profit (FY2010 +234 MEUR) compared to revenues. Other segments and their operating profit/loss in 2010 were Forest and timber (+181 MEUR), Label (+87 MEUR) and plywood (-18 MEUR).

UPM has P/B of 0.6 and P/E 2011 estimate of 8.2 (data from Valuatum). Yeild might be as high as 6%. However, dividends have fluctuated in recent years and the company is cyclical so profits and dividends might swing wildly.

For me the company is a long term value and asset play. With the very uncertain outlook for world economy, the cyclicals are dangerous plays. However, the prices of cyclical Finnish companies were slashed in recent weeks due to broad sell off and foreign investors fleeing periphery markets such as Finland. It was a good time to start to add to a new position close to home.