Segezha valuation expected to increase as it consolidates Russian forest products sector

  • An agreement between the Segezha group and Bonum Capital of Murat Aliev will see the former expand its resource base again by half.
  • When the deal is concluded, Segezha is expected to become the largest Russian player in the forest products sector. Valuation is expected to double in the medium term as the company catches up with its global peers.
  • The post-pandemic macroeconomic environment appears favorable to Segezha’s business model, which includes high exports and self-sufficiency.

The past year has been a successful one for Russian IPOs. The shares of all Russian companies that went public this year have risen since their IPO, with the sole exception of Fix Price. So it’s no surprise that investors are keeping a particularly close eye on newcomers.

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

Rich in resources

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

As a result of this agreement, the Segezha group is set to become the largest producer of sawn timber in Russia and the second in Europe. It will also join the list of the 10 largest global players in the sector. Inter Forest Rus’ expected 2021 EBITDA is $ 152 million, which together with Segezha’s 2021 forecast total makes for a combined EBITDA of $ 539 million. Their total net worth will rise to $ 1,898 million. The market stands out for its export potential as well as its ecological utility, which can be particularly attractive for ESG funds when properly managed. The main export markets for Inter Forest Rus are 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 global economy, together with the loose monetary policy of the world’s major central banks, should foster a conducive environment in the forest products market. And increasing Segezha’s resource base is a serious statement of intent for long-term capitalization growth.

The combined company is expected to have an advantage in terms of economies of scale, driving manufacturing prices well below those of its peers. It will also become one of the largest leaseholders of forest reserves in the world with 16 million hectares under management. This will enable Segezha to achieve a crucial level of self-sufficiency in its core commodities, with insulation from global commodity fluctuations – an invaluable force in a post-pandemic global economy characterized by decoupling and logistical chaos. The group will also move closer to growing Asian markets as a result of the deal, including China, where the construction industry is currently seeing increased demand for resources.

The agreement is timely and likely to benefit from renewed interest in the development of Siberian cities. The Russian government aims to create 3-5 new cities of less than one million inhabitants by 2030, as well as to rebuild the Trans-Siberian Railway and the main Baikal-Amur line. The Segezha Group currently has an EV / EBITDA multiple of 5.8, while the median EV / EBITDA multiple predicted for 2021 among its international peers is 7.4 (source: TR Eikon, October 6), and the highest par close to Segezha – Mondi – has a multiple of 8.6. The valuation of the combined companies will be around 4.0xEV / EBITDA (with capitalized leasing), according to a report from VTB Capital. An additional strategic advantage for the company lies in the possibility of trading carbon credits in the future, as the forestry industry, unlike the mining industry, produces oxygen and consumes carbon dioxide through it. repeated use and renewal of forests.

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

Market Snapshot

The global forest products market has been hit hard by COVID-19 as a wave of lockdowns caused economic activity to decelerate rapidly, but the sector is experiencing a rapid recovery in line with the global economy. Demand recovered rapidly throughout 2021, with prices rising as the need to replace single-use plastics and the growth of e-commerce boost the industry. Other big players in the market include North American companies like Weyerhaeuser and Westrock, as well as some big European players like Stora Enso and Holmen.


Among the risks for the strategic investor is the potential for increased state regulation and the introduction of higher excise duties in Russia. The inclusion of China on Segezha’s list of export markets also raises the question of whether trade wars could influence demand, as the company’s expanding export markets typically risk falling. expose to fluctuations in exchange rates. Another possible risk is a deterioration in the price of the sector due to the macroeconomic slowdown. So far, however, that final risk seems slim as the global economy accelerates the exit from the pandemic.

Small acorns …

I’ve been following Segezha since the company’s successful IPO in April, and it seems to me a solid alternative to global timber and forestry ETFs for the growth investor with a long-term horizon. This merger-acquisition represents the beginning of the growth promised by the company in terms of its offer (it could hardly achieve its long-term objective of becoming the fifth largest forest producer in the world with a single base in Karelia). The combination of strong fundamentals and an underutilized local market (Russia holds just 4% of the global forest market, according to the UN) could be precisely the environment needed for this sapling to rise above. from the canopy of its global peers.

About Harry Qualls

Harry Qualls

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