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here,” says Aliyev. “Russia was behind [the rest of the world in the production of packaging], but now it is growing at an attractive rate.”
The global market demand for pulp is rising at a much more sedate 1.5%-2% a year, but it's a global market, so the volumes are huge. Aliyev estimates
the global production of pulp at some 50mn tonnes per year, which means the paper and pulp companies need to add approximately 1mn tpy of paper production capacity. That’s a lot. It requires one new plant each year to produce that much new paper at an investment cost of $1.5-2bn and a timeline of 3-5 years to bring it online. As the Scandinavian production is largely tapped out, that means meeting the bulk of future paper and pulp demand will fall on Russia.
Developing Russia’s forests is now
also on the Kremlin’s agenda. Russia signed off on the Paris Climate accord
in 2019 and is committed to reducing
its emissions, as bne IntelliNews reported in “The Cost of Carbon in Russia”.
At a corporate level too, Russian companies are also embracing the rise of environmental, social and governance (ESG), partly as some big Scandinavian institutional investors have begun to ban investments into companies that have poor ESG scores.
In addition to putting regulations and an inspection regime in place under
a Federal Forestry Agency, part of
the Ministry of Natural Resources & Environment, from January next year the government will ban the export of raw timber altogether.
“There is lots of export [of raw timber], especially to China, but the government wants to incentivise investment into higher value-added products,” says Aliyev, who adds that the cost of leases
in Russia represents a competitive advantage for forestry product producers.
IPO plans
The company already issued its first RUB10bn (ca $140mn) bond on the Moscow Exchange (MOEX) in December 2019 with a coupon of 7.1% that was issued in rubles, but then swapped into euros to bring the cost of borrowing down, says Aliyev. “It was cheaper than issuing a Eurobond. The perception is that the cost of borrowing in Russia is very high, but it’s not necessarily true.”
And the company also has a RUB35bn credit line from a consortium of Russian and international banks that it can draw on. Banks are happy to lend to Segezha as, like other raw materials producers, its costs are in rubles but its exports earn foreign exchange revenues, making the company relatively immune to Russia’s perennial crises. Indeed, the shocks that the Russian economy felt in 2020 and the circa 20% devaluation of the ruble that resulted only improved Segezha’s profitability.
The borrowing means Segezha’s net debt-to-LTM OIBDA ratio was 3.3x for 9M 2020, which Aliyev considers is justified and more than manageable given the company’s fast growth rate.
The company’s financial results are very strong. Sistema reported 10% year- on-year revenue growth for the 3Q20 to RUB185bn ($2.5bn) in 3Q20 under IFRS, with adjusted operating income before depreciation and amortisation (OIBDA) up by 14% to RUB72bn with 39% margin, part of which was due to strong third-quarter 2020 results from Segezha that saw revenues up 38% y/y to RUB19bn ($250mn), and OIBDA more than doubled (106.9%) y/y to RUB5.1bn ($67mn) with a OIBDA margin of 26.7%, an increase of 8.9pp from a year earlier, bne IntelliNews reported in December.
And the next big event will be to float the company. Segezha plans to raise $0.4bn-0.5bn in an IPO planned in Moscow in spring 2021, Reuters reports citing unnamed sources. Aliyev declined to comment on the reports.
However, the shareholders approved
a new share issue of 11.94bn new shares last week, which could potentially double the existing share count. Notably, a new legal form as a public joint-stock company has also been approved, which means the company
is now technically ready for an IPO.
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