Executive summary
UPM, Stora Enso and Sappi upgraded to Buy (from Hold)
We have raised UPM’s price target to EUR 15.0 (from EUR 13.5), while leaving Stora Enso’s
target unchanged at EUR 9.5. Our revised outlook on these European names calls for a more
optimistic view on magazine papers and coated fine papers, which are key product areas for
the two companies’ earnings turnaround. Many challenges are yet to be overcome, but we
expect earnings to trough in ’08. (Please see our separate Alerts on UPM and Stora Enso for
details.) We reiterate our Sell on Norske Skog (PT NOK 15.0) and Holmen (PT SEK 200). The
newsprint outlook remains gloomy and earnings are expected to continue to deteriorate. In
addition, we reiterate our Buy on Smurfit Kappa (PT EUR 16.0) and M-real (PT EUR 3.5). We
have also upgraded South African stock Sappi (co-covered with Manuel Greenland) to Buy
from Hold and raised our TP to ZAR 115 from ZAR 87 (see the Bulletin on Sappi for details).
Regained pricing power for magazine papers
The European magazine paper markets are very tight. Coated magazine papers rose by 6% in
early ’08, according to the German list price, while uncoated grades rose by 2%. This is the
first European price increase in seven years and it is mainly driven by capacity closures.
Deliveries YTD (Jan-Feb) are up by 8.7% for coated grades and 4.5% for uncoated grades.
We attribute these strong statistics to consumers restocking because of longer lead times
and the fear of additional price increases in ’08. This situation is unique since restocking
normally takes place at the start of an upcycle when the underlying demand increases. Thus,
we expect markets to stay tight for a prolonged period, especially since no new machines are
planned. UPM has the largest exposure with 33% of sales generated from magazine papers.
FX less of a threat for magazine papers and coated fine papers in ‘08
The US magazine paper markets are also very tight following capacity closures and
consolidation – it’s not the underlying demand driving prices this time. Coated magazine
paper prices have risen by 21% since mid-’07, while uncoated grades have risen by 15%. An
additional 7% price increase is scheduled for coated magazine papers in April. The coated
fine paper price has risen by 10%. Hence, the US magazine paper prices in EUR-terms have
actually risen despite the sharp USD depreciation since mid-’07. US coated fine paper prices
in EUR-terms are almost flat. The US is the most important overseas export market for
European producers. To sum up, the USD depreciation is not as bad as one could imagine for
European magazine paper and coated fine paper producers.
Russian wood duties not likely to materially fuel cost inflation in ‘09
We believe it is likely that Russia will implement the EUR 50/m3 export duty on wood from 1
Jan ’09. The general view is that this would have a severe negative effect on costs. Our view
is contrarian. We believe that Finnish producers will be forced to close down a significant
amount of pulp capacity (>1m tonnes) and potentially also paper capacity in order to prevent
the marginal costs from undermining the Finnish industry. Although costly, these capacity
closures should result in improved cost position, strengthen market balance and higher
product prices, in our view. In short, the LT benefits outweigh the ST negatives, we believe.
Consolidation is likely to happen, but it will take time
The need for consolidation has long been discussed but hasn’t materialized to a great degree
in Europe. The producers here have focused on capacity closures and the only material
divestments that have taken place are Stora Enso’s sale of its North American business and
its merchant operations. M-real has also divested its merchant business. We think consolidation
is likely to start before year-end ’08, especially in fine paper segments. As an example,
M-real has indicated that all options are being considered for its Graphics paper division.
UPM and Stora Enso are trading at 10-year lows in terms of P/BV and dividend yield
UPM and Stora Enso have a strong financial situation despite substantial asset write-down
and many years of deteriorating profitability. UPM is trading at a P/BV of 0.85x, while Stora
Enso trades at 0.79x. UPM’s dividend yield is 6.7%, while Stora Enso yields 6.0%. We
expect the dividend to be sustainable for the two companies in ’08.

Table of Contents
Executive summary ........................................................................... 3
UPM, Stora Enso and Sappi upgraded to Buy (from Hold)................................................3
Regained pricing power for magazine papers...................................................................3
FX less of a threat for magazine papers and coated fine papers in ‘08.............................3
Russian wood duties not likely to materially fuel cost inflation in ‘09 ...............................3
Consolidation is likely to happen, but it will take time.......................................................3
UPM and Stora Enso are trading at 10-year lows in terms of P/BV and dividend yield .....3
Top stock picks .................................................................................. 5
UPM – strong position to benefit from improving magazine paper markets.....................5
Smurfit Kappa – remarkable value supported by healthy containerboard markets............5
Risks – A European recession and/or continued sharp USD depreciation ........................5
EPS estimates .................................................................................... 6
Price increases for magazine papers and coated fine papers drives earnings upgrades ..6
Valuation ............................................................................................ 7
An opportune time for selective investment.....................................................................7
Earnings multiples are never attractive at the earnings trough .........................................7
P/BV-multiples close to10-year historical low levels .........................................................8
The high dividend yield for Stora Enso and UPM supports the current share price ..........9
Industry outlook .............................................................................. 11
A global economic slowdown is a fact ...........................................................................11
Strong start for European magazine papers and coated fine papers ..............................11
Weak start for newsprint and coated fine papers ...........................................................11
Subdued European demand growth in ‘08......................................................................12
Substantial capacity closures in certain paper grades are paying off ..............................12
High operating rates supports price increases................................................................13
Returned pricing power in magazine papers and fine papers .........................................14
Currency – USD depreciation not only bad news............................................................14
Magazine papers and coated fine papers not affected by the recent USD depreciation 15
Demand/Supply by product ........................................................... 17
Magazine Papers – regained pricing power ............................................................................17
Fine Papers – pricing power around the corner ......................................................................18
Newsprint – challenging times ahead .....................................................................................20
Containerboard – healthy market balance to continue ............................................................21
Market pulp – balanced market on the back of healthy demand and capacity closures .........22
Appendix A: Company RTNs .......................................................... 24
Appendix B: Demand/Supply global overview (by grade) .......... 36
Demand/Supply overview.......................................................................................................37
Containerboard – Testliner (recycled)......................................................................................38
Containerboard – Kraftliner (Virgin fibre) .................................................................................40
Fine papers .............................................................................................................................42
Magazine papers.....................................................................................................................48
Newsprint ...............................................................................................................................54
Market pulp............................................................................................................................56