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A 3.9 million tons/year factory. INKP will expand its business by building a new industrial paper factory with a total capacity of 3.9 million tons/year in Karawang, West Java, which will be built in two stages. The first stage, with an installed capacity of 2.4 million tons/year, is expected to commence operations in 2025, and the second stage is projected to start production activities two years after the first. With the new factory, INKP’s industrial paper production capacity will increase by more than 150% to 6.2 million tons/year, boosting its total installed capacity to 11.0 million tons/year (pulp factory: 3.1 million tons/year, culture paper: 1.7 million tons/year).
Pulp price recovery. By the end of 2Q23, the global benchmark pulp prices had dropped by -25.5% ytd (softwood/BSK) and -36.5% ytd (hardwood/BHK), mainly due to excessive pulp & paper inventories in China. The drop in prices caused INKP's selling price to fall -10.5%, hurting the company’s performance. However, we believe that the price of pulp and paper products will recover, driven by economic growth in Asia (especially China), which will certainly benefit INKP, whose main export destination is Asian countries.
Net profit growth of +3.4% yoy and +10.1% yoy in FY24F-25F. Supported by additional production capacity from its new factory and the recovery of pulp & paper prices, we project INKP to book revenue growth of +3.6% yoy and +17.5% yoy in FY24F and FY25F, with the pulp and cultural paper segment as its main source of revenue in FY24F, before then shifting to industrial paper in FY25F (Figure x). Given the potential growth in revenue and relatively stable expenses, we forecast INKP to post operating profit growth of +3.4% yoy and +12.4% yoy, and net profit growth of +3.4% yoy and +10.1 % yoy.
BUY, TP IDR 13,500/share (5.6x FY24F PER). Considering the positive outlook for the pulp & paper industry, its solid capital structure, and its expansion efforts (which should help the company post strong numbers in the future), we assign a BUY rating on INKP with a TP of IDR 13,500/share, implying 5.6x FY24F PER and 4.6x FY24F EV/EBITDA. Risks: Lower-than-expected selling prices, intense competition, and exchange rate fluctuations.
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