The greenest IPO of the year by a Russian forestry holding shows how sustainable principles can help some industries go from zero to hero.
Thirty years ago, a forestry IPO to mark Earth Day may have drawn a laugh. But that’s all changed. The world needs lumber as a natural biodegradable building material, it needs well-managed forests for carbon reduction and it needs sustainable alternatives to plastic, concrete and cement.
Unlike many heavy industries and raw materials producers, forestry companies not only produce an ever-increasing range of higher value-added products but can also operate on a totally sustainable basis, with many of the leading global players contributing tangible positive environmental benefits.
Segezha Group places environmental considerations at the heart of its business, ensuring that for every tree chopped down, another is planted in its place. In total, 83% of its forests have been voluntarily certified to Forestry Stewardship Council standards – the global “gold standard” in the sector – and the Group plans to increase this percentage towards 100% going forward. Institutional and retail investors alike have rewarded the Group’s ESG plans with a positive response, with Segezha targeting a market cap of around $2bn in its IPO.
ESG has become a feature across the industry, especially in packaging, where consumers and industry alike are seeking alternatives to single-use plastics. One recent example is Graphic Packaging, which yesterday announced its new paperboard alternative to plastic fruit trays. This fully recyclable product is but one of a plethora on the market, as this industry pivots to make environmental protection its utmost priority.
These trends are also witnessed across the construction industry, where more and more consumers are switching to eco-friendly CLT. This material, which is estimated to lower a building’s carbon footprint by 150 tonnes per story, has already been used to build the 85.4m Mjøstårnet tower in Norway, with more buildings to follow in the US and Europe soon.
There is even considerable interest in wooden wind turbines, which provides a sort of double ecological benefit. Vestas Ventures’ investment into Swedish wood technology company Modvion aims to make renewable energy even greener by removing metal’s carbon footprint and allowing the turbine to act as an absorber of CO2 in its own right.
As well making a positive environmental impact, there is also plenty of money to be made in this industry. In the wake of covid-induced boredom and stimulus-induced liquidity, a red-hot housing construction and renovation boom is taking off across the globe. This boom has sent timber prices soaring to unprecedented heights, with the futures market standing at a record $1,326.70 per 1,000 board feet on Monday, as supply struggles to keep up with skyrocketing demand.
These astronomical prices make forestry firms a goldmine at present, leading industry expert Stinson Dean to state “If you can source the lumber, you’re making a whole bunch of money right now,” in an interview on Bloomberg Television last week. (On this front, Segezha Group – with access to forests covering a greater area than Austria or Ireland – seems well placed to benefit.)
Having seen these prices, investors have been racing to get involved in this ‘green gold’. The iShares Global Timber & Forestry ETF, worth around $393 million, has nearly doubled in the past year and is now at a record high, continuing to gain this year despite heightened volatility in markets amid fears of a bubble.
The fact that there is only one major ETF available, though, is indicative that the industry is still relatively underrepresented on the markets, and does not get huge amounts of media coverage. However, the industry does seem to be entering a new phase of development, with potential consolidation underway, such as Mondi’s bid for rival firm DS Smith. This makes Segezha’s impending IPO all the more exciting, as a fresh face from Russia’s forest filled lands will give investors more options and spur industry growth.
The IPO also stands out as a shrewd investment that could potentially pop once markets open. It’s 6x EV/EBITDA multiple – the standard measure for the sector, where P/E ratios and others are less relevant – screams ‘undervalued’, perhaps a consequence of recent market volatility brought about by geopolitical tensions beyond the Company’s control. Despite these background concerns, yesterday’s reaction to the Company’s pricing announcement from financial media and analysts was positive, suggesting that the Company can weather the volatility to provide long-term returns to investors.
The forestry industry seems well placed to continue going from strength to strength in the future, as more people turn to clean materials and away from concrete, cement and, of course, plastics. The lucrative economic returns, coupled with a strong environmental focus, make this the ideal sector for investment as we move through the 21st century’s third decade.