Many often consider Russia to be the world’s gas station, but frankly this is far from reality. Russia is a unique country, containing vast concentrations of all sorts of natural resources, including land, water, minerals and above all, forests. At present, just five countries account for over half of all global forests. Russia is a recognised leader among these, holding over 20% of global forest resources. Brazil trails Russia in second, with 1.6x less forest resources, followed by Canada, USA and China.
While forest resources can be considered renewable, this does not mean that we can simply rampage through them. In Russia, stringent reforestation regulation is in place, ensuring every tree cut down is replaced.
Despite its size, potential and vast resource base, Russia’s forestry sector is hardly represented on capital markets. A potential IPO from Segezha Group, a subsidiary of PJSFC Sistema, could partially make up for this. At the end of last year, Sistema successfully listed its e-commerce company Ozon, and it seems the corporation is planning to continue in this vein with its other portfolio companies.
Segezha Group holds a leading position in Russia, is ranked second in Europe by production of paper sacks and is #5 globally for large size birch plywood. Segezha is also the leading producer of sawn timber in Russia. The Company’s sales are well-diversified geographically, with Europe, Russia and Asia each accounting for 28-32% of total sales. Over 70% of products are diversified. Segezha is vertically integrated and has long-term lease agreements with the state.
As the global economy continues to recover and growth-stimulating projects, including large-scale infrastructure projects, are launched across the world, demand for the Company's products will grow. In this regard, we can safely call Segezha ‘a growth company’, complete with high value-added products and high margins. Paper packaging is currently experiencing a boom, due to global ESG trends and the rise in online trading. Demand for paper packaging is set to outpace average global economy growth.
The construction industry will continue to play an important role in driving prices for Segezha’s products. After last year's pandemic-induced downturn, prices for wood and paper products have begun to recover on the back of the construction industry restart. As a result, global industry stocks are rising, and the outlook remains optimistic.
While the forestry sector is demonstrating robust growth, Segezha’s success should not be attributed solely to the industry’s expansion. The Company is actively investing in its own development and expansion and is currently implementing a major investment programme, which means that Segezha’s facilities will continue to be equipped with the most up-to-date technologies. Segezha is well-positioned on the global cost curve – in the first quartile – and harvests up to 80% of its wood requirements. This can guarantee high multiples for the Company’s IPO, especially compared to Segezha’s global peers. One international peer – Mondi (LON:MNDI) – is currently traded at a 9.5 EV/EBITDA multiple.
We are still yet to see if the geopolitical and in-built ‘Russia risks’ will be reflected in the Company’s valuation. So far, these issues have negatively affected the ruble and the national debt. On the other hand, a weaker ruble will drive Segezha’s exports, so bottom-up investors have no need to worry. Generally, investors favour companies with low costs, a diversified product portfolio and high margins. Another important development for the stock market, both globally and in Russia, has been the emergence of retail investors taking part in new, attractive IPO offerings. In the majority of cases, these investments have been justified by healthy returns.