Ramp-up Of Oulu Packaging Line Will Strengthen Position In Global Consumer Board Market

Key Takeaways

• Strategic focus on high-demand packaging segments and efficiency improvements will enhance revenue, margins, and profitability.
  
• Selling forest assets and reducing capital expenditures bolster financial flexibility and balance sheet strength.
  
• Market volatility, rising wood costs, and geopolitical uncertainties threaten Stora Enso's revenue, profitability, and strategic flexibility amid high net debt.

Catalysts

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

• Stora Enso is focusing on the ramp-up of its new packaging board line in Oulu, Finland, which is expected to reach full production capacity by 2027, contributing €800 million in top-line growth and increasing the company's share in the global consumer board market. This focus on high-demand segments such as food and drink packaging is likely to impact future revenue positively.
  
• The completion of the Oulu investment will mark the end of a heavy investment phase, reducing capital expenditures to historical averages (€600-800 million annually) from 2025 onwards. This is expected to improve cash flow and profitability.
  
• Efficiency improvements, cost-saving measures, and reduced fixed costs have led to a significant increase in adjusted EBIT by 75% year-on-year. Continuous efforts to optimize sourcing, operational efficiencies, and commercial activities are expected to further enhance net margins and earnings.
  
• Stora Enso plans to sell approximately 12% of its forest assets in Sweden, which could help reduce net debt and increase financial flexibility, subsequently improving the company’s net-debt-to-adjusted-EBITDA ratio and overall balance sheet strength.
  
• The strategic investments in fiber-based packaging positions Stora Enso well for sustained growth. The increasing demand for sustainable and renewable packaging solutions is expected to drive long-term revenue growth in line with global megatrends focused on sustainability.

Stora Enso Oyj Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Stora Enso Oyj's revenue will grow by 6.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.5% today to 6.9% in 3 years time.
• Analysts expect earnings to reach €740.7 million (and earnings per share of €0.99) by about April 2028, up from €-136.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €909 million in earnings, and the most bearish expecting €621.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.1x on those 2028 earnings, up from -44.0x today. This future PE is lower than the current PE for the GB Forestry industry at 23.6x.
• 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 11.06%, as per the Simply Wall St company report.

Stora Enso Oyj Future Earnings Per Share Growth

Risks

• Market volatility, subdued demand, and pricing fluctuations, especially in Packaging Solutions, pose ongoing risks that could prevent the company from achieving higher revenue and net margins.
  
• Increasing wood costs are a significant concern, as the company's profitability and net margins depend heavily on the ability to offset these costs with efficiency improvements.
  
• The ramp-up of the Oulu packaging board line involves execution risks. Delays or issues in reaching full production capacity by 2027 could impact expected top-line growth and earnings.
  
• High levels of net debt and the ongoing need to improve the net-debt-to-adjusted-EBITDA ratio suggest financial pressures that could limit strategic flexibility and earnings.
  
• Exposure to potential trade tariffs and geopolitical uncertainty, particularly concerning sales expansion in the U.S., may negatively impact net revenue and profitability if market access is restricted.

Valuation

• The analysts have a consensus price target of €11.743 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 €10.8 billion, earnings will come to €740.7 million, and it would be trading on a PE ratio of 17.1x, assuming you use a discount rate of 11.1%.
• Given the current share price of €7.58, the analyst price target of €11.74 is 35.5% 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.