Focus On Sustainability At Beihai Site Will Strengthen Future Market Position

Key Takeaways

• The focus on sustainability and efficiency at the Beihai site could enhance market competitiveness and boost net margins.
  
• The sale of Swedish forest assets strengthens financial stability and could enhance earnings by reducing net debt.
  
• Stora Enso's profitability faces risks from high costs, market volatility, and strategic asset sales potentially impacting long-term revenue capabilities.

Catalysts

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

• Stora Enso's profit improvement program aims to achieve an adjusted EBIT improvement target of €120 million by the beginning of 2025, which could significantly enhance earnings.
  
• The decision to retain the Beihai packaging board site is seen as strategically advantageous due to improved cost competitiveness and its strong position in the Asia Pacific market, which should positively impact their net margins.
  
• The sale of 12% of Swedish forest assets is expected to strengthen the balance sheet by reducing net debt, thus improving financial stability and potentially enhancing earnings.
  
• Strategic steps are being taken to optimize product mix and improve operational efficiencies, particularly at the Beihai site, which could support revenue growth and profitability in key markets.
  
• The focus on sustainability, including energy efficiency and circularity, is set to enhance cost structure and market competitiveness, potentially boosting net margins in the long term.

Stora Enso Oyj Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Stora Enso Oyj's revenue will grow by 6.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.9% today to 6.8% in 3 years time.
• Analysts expect earnings to reach €734.0 million (and earnings per share of €1.01) by about December 2027, up from €-83.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €588.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.5x on those 2027 earnings, up from -93.9x today. This future PE is lower than the current PE for the GB Forestry industry at 26.5x.
• Analysts expect the number of shares outstanding to decline by 2.77% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.14%, as per the Simply Wall St company report.

Stora Enso Oyj Future Earnings Per Share Growth

Risks

• Stora Enso faces ongoing challenges in the Packaging Solutions division due to substantial margin pressure and market overcapacity, which could impact the division's ability to sustain profitability and negatively affect net margins.
  
• Despite the positive contribution of the Pricing increases to their revenue, high wood costs continue to exert pressure on margins, potentially reducing profitability in the future unless offset by other cost reductions or price increases across its divisions.
  
• The anticipation of sequential market recovery slowing down poses a risk to revenue growth. Stora Enso is facing ongoing market volatility, high inflation, potential labor strikes, and high wood costs, which may affect demand and pricing, subsequently impacting earnings.
  
• Weak demand in the Biomaterials division, partly due to ramped-up new market capacity and global inventories above the 5-year average, suggests that there could be sustained pressure on prices and profitability, impacting revenue growth and margins.
  
• The decision to sell 12% of their forest assets, while aimed at reducing debt, may result in a loss of long-term revenue-generation capacity if the value of the divestiture doesn't align with the long-term strategic benefits those assets provide.

Valuation

• The analysts have a consensus price target of €13.28 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 €17.4, and the most bearish reporting a price target of just €9.8.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €10.7 billion, earnings will come to €734.0 million, and it would be trading on a PE ratio of 17.5x, assuming you use a discount rate of 10.1%.
• Given the current share price of €9.88, the analyst's price target of €13.28 is 25.6% 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.