Completion Of Kemi And Husum Mills Will Improve Efficiency And Attract Eco-Conscious Customers

Key Takeaways

• Strategic facility upgrades and sustainability projects are poised to enhance product quality and margins, leveraging premium pricing and attracting eco-conscious customers.
  
• Operational improvements, including possible facility closures and better demand alignment, aim to boost margins and cash flow through cost efficiency.
  
• Weak paperboard demand, cost pressures, and operational disruptions are straining Metsä Board's profitability, with potential tariff changes worsening market imbalance and profit margins.

Catalysts

Engages in the folding boxboard, fresh fibre linerboard, and market pulp businesses in Finland and internationally.

• Metsä Board's strategic investments in renewing and upgrading production facilities, such as the paperboard machine in Simpele, are expected to enhance product quality and energy efficiency, which could lead to higher revenue through premium pricing and improved margins due to lower production costs.
  
• The ongoing and planned projects aimed at reducing carbon emissions and moving towards fossil-free production can attract sustainability-focused customers and provide opportunities for higher revenue growth as demand for environmentally friendly products increases.
  
• The completion and ramp-up of the new capacity at the Kemi and Husum mills should alleviate some current operational inefficiencies, potentially leading to improved operating margins and earnings as full capacity is realized and production becomes more cost-efficient.
  
• Mika Joukio's remarks on the potential closure of the Tako mill and improvements at the Kyro mill suggest a focus on consolidating operations to improve cost competitiveness, which can help increase net margins by eliminating loss-making operations.
  
• A closer alignment of production with demand through temporary layoffs and production curtailments could mean better control over inventory levels, leading to improved cash flow management and potentially enhancing EBITDA by reducing costs associated with overproduction.

Metsä Board Oyj Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Metsä Board Oyj's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.3% today to 7.7% in 3 years time.
• Analysts expect earnings to reach €176.7 million (and earnings per share of €0.5) by about April 2028, up from €25.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €255 million in earnings, and the most bearish expecting €120.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.7x on those 2028 earnings, down from 44.1x today. This future PE is lower than the current PE for the GB Packaging industry at 29.9x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.84%, as per the Simply Wall St company report.

Metsä Board Oyj Future Earnings Per Share Growth

Risks

• Despite Metsä Board's increase in paperboard delivery volumes, the lower paperboard prices and high costs, such as in wood and logistics, have weakened profitability, impacting overall earnings.
  
• Seasonal and market-related production curtailments, along with potential layoffs, highlight weak demand for paperboard, particularly in Europe, which could negatively affect future revenues.
  
• The ongoing economic challenges in major markets like Germany and overall European economies contribute to significantly lower paperboard demand compared to historical levels, potentially hampering revenue growth.
  
• The potential tariff changes in the U.S., a key market for Metsä Board’s exports, could lead to a redirection of volumes back to Europe, exacerbating the existing market imbalance and putting further pressure on margins.
  
• The ongoing Finnish strikes and other operational disruptions, such as the Kemi mill explosion, have already had significant negative impacts on profits and could continue to negatively impact earnings if similar disruptions occur in the future.

Valuation

• The analysts have a consensus price target of €4.342 for Metsä Board Oyj based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €5.6, and the most bearish reporting a price target of just €3.25.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €2.3 billion, earnings will come to €176.7 million, and it would be trading on a PE ratio of 12.7x, assuming you use a discount rate of 5.8%.
• Given the current share price of €3.14, the analyst price target of €4.34 is 27.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.