New Recycled Containerboard Capacity Will Secure Market Position

Key Takeaways

• Norske Skog's expansion in packaging paper and strategic machine operations will boost market share and revenue growth, especially in Europe.
  
• Operational efficiency improvements and sales of non-core assets aim to enhance liquidity and reduce debt, positively impacting net margins and earnings.
  
• Declining demand and high operational costs challenge Norske Skog's profitability, while significant capital expenditure and market competition threaten financial stability.

Catalysts

Engages in the production and sale of publication and packaging paper products in Norway, rest of Europe, North America, Asia, and Africa.

• Norske Skog is increasing its capacity in the packaging paper market with two recycled containerboard machines coming online, expected to significantly boost deliveries over the next couple of years. This expansion should positively impact future revenue.
  
• The production and ramp-up of Golbey PM1, set to reach full utilization by 2027, will enhance Norske Skog's presence as a reliable supplier, therefore enhancing its market share and uplifting revenue in the European containerboard market.
  
• Strategic moves like the potential low CapEx restart of PM6 and closure of less efficient PM4 and PM5 at the Saugbrugs mill could lead to improved operational efficiency, positively affecting net margins through cost reductions.
  
• The receipt of significant energy certificates and grants expected in 2026 and 2027 could boost net margins by offsetting operational expenses, thereby enhancing financial performance.
  
• Sale of the Australasian operations for NOK 150 million and ongoing focus on reducing production costs and optimizing working capital suggest a positive outlook on liquidity and potential reduction in net debt, which could improve earnings through lower interest obligations.

Norske Skog Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Norske Skog's revenue will grow by 21.1% annually over the next 3 years.
• Analysts are not forecasting that Norske Skog will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Norske Skog's profit margin will increase from 0.1% to the average NO Forestry industry of 0.3% in 3 years.
• If Norske Skog's profit margin were to converge on the industry average, you could expect earnings to reach NOK 53.4 million (and earnings per share of NOK 0.64) by about April 2028, up from NOK 14.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 52.9x on those 2028 earnings, down from 112.1x today. This future PE is lower than the current PE for the NO Forestry industry at 112.1x.
• 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 11.14%, as per the Simply Wall St company report.

Norske Skog Future Earnings Per Share Growth

Risks

• The European newsprint and magazine paper markets are under pressure due to expected demand declines through 2025, which could lead to oversupply and impact revenue negatively.
  
• The company faces ongoing high costs for recycled paper, fresh fibre, and energy, which puts pressure on profit margins and net earnings.
  
• There is significant capital expenditure required for projects such as the Golbey PM1 startup and potential Saugbrugs developments, which could strain financial resources and impact net margins if not offset by increased revenue.
  
• The company may face challenges from labor and supply chain disruptions, as evidenced by previous weather-related production interruptions, which could impact production and revenue.
  
• The market for coated mechanical paper is particularly challenging, with low utilization rates and competition limiting profitability, thus potentially reducing overall earnings.

Valuation

• The analysts have a consensus price target of NOK24.5 for Norske Skog 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 NOK30.0, and the most bearish reporting a price target of just NOK19.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NOK16.9 billion, earnings will come to NOK53.4 million, and it would be trading on a PE ratio of 52.9x, assuming you use a discount rate of 11.1%.
  
• Given the current share price of NOK18.5, the analyst price target of NOK24.5 is 24.5% 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.