Renewable Packaging And Board Line Expansion Will Strengthen Future Operations

Key Takeaways

• Focus on renewable packaging and Oulu mill expansion is set to drive revenue growth and improve efficiency.
  
• Operational synergies from acquisitions and a leaner structure aim to boost net margins and margin stability.
  
• High fiber costs and ramp-up expenses, along with potential inefficiencies from restructuring, could pressure Stora Enso's margins and operational effectiveness.

Catalysts

Provides renewable solutions for the packaging, biomaterials, wooden constructions, and paper industries in Finland and internationally.

• Stora Enso's focus on expanding its renewable packaging business, which constitutes over 60% of sales and aligns with strong sustainability trends, is expected to drive future revenue growth as demand for eco-friendly packaging solutions increases.
  
• The ramp-up of the new consumer board line at the Oulu mill, anticipated to reach full annual capacity by 2027, is likely to enhance production capacity and efficiency, positively impacting both revenue and earnings.
  
• The acquisition of Junnikkala sawmills is expected to yield significant operational synergies, leading to reduced wood costs at the Oulu pulp and board mill, which should improve net margins.
  
• The implementation of a leaner organizational structure with 7 P&L responsible business areas is designed to enhance operational efficiency and performance culture, potentially boosting net margins and earnings.
  
• Stora Enso's internal supply of eucalyptus pulp from Latin America joint ventures reduces dependency on volatile pulp markets and is expected to enhance margin stability and earnings over time.

Stora Enso Oyj Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Stora Enso Oyj's revenue will grow by 5.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.1% today to 6.1% in 3 years time.
• Analysts expect earnings to reach €666.8 million (and earnings per share of €0.87) by about May 2028, up from €-102.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €841 million in earnings, and the most bearish expecting €597.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.7x on those 2028 earnings, up from -63.1x today. This future PE is lower than the current PE for the GB Forestry industry at 30.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.74%, as per the Simply Wall St company report.

Stora Enso Oyj Future Earnings Per Share Growth

Risks

• The ramp-up of the new packaging board line at Oulu is expected to incur a cost of approximately €100 million for the full year 2025, with a significant portion impacting the second quarter. This could adversely affect net margins in the short term.
  
• High fiber costs, mainly from wood, continue to impact results negatively, with a total adverse effect in the quarter being €131 million. This ongoing cost pressure can affect the company's earnings if not offset by price increases or cost efficiencies.
  
• The organizational restructuring implies potential inefficiencies or transitional challenges, and while it could bring about future efficiencies, the initial process might impact operational effectiveness and, consequently, financial performance.
  
• Heavy reliance on European and Latin American operations makes Stora Enso potentially vulnerable to regional economic fluctuations or regulatory changes, which could affect revenue stability.
  
• Overcapacity and price pressure in the Packaging Solutions division, alongside ramp-up costs related to new facilities like De Lier, may drag on the division's returns and overall profitability.

Valuation

• The analysts have a consensus price target of €11.057 for Stora Enso 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 €14.0, and the most bearish reporting a price target of just €7.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €10.9 billion, earnings will come to €666.8 million, and it would be trading on a PE ratio of 17.7x, assuming you use a discount rate of 10.7%.
  
• Given the current share price of €8.17, the analyst price target of €11.06 is 26.1% 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.