Weak Nordic Demand And Rising Costs Will Erode Margins

Key Takeaways

• Shifts in work habits and alternative lodging options are weakening hotel demand and pricing power, putting ongoing pressure on Scandic's occupancy and profitability.
  
• Rising costs, regulatory burdens, and sustainability demands are straining margins, increasing financial risk, and limiting future earnings growth opportunities.
  
• Expansion into attractive markets, focus on sustainability and digitalization, asset-light growth, strong financial discipline, and positive secular trends support scalable revenue and improved margins.

Catalysts

Engages in the operation and franchising of hotels in Sweden, Norway, Finland, Denmark, Germany, and Poland.

• Persistent growth in remote and hybrid work models threatens to structurally reduce business travel demand, making Scandic's future occupancy rates and RevPAR vulnerable to prolonged weakness, especially as corporate and group bookings in key Nordic markets are already recovering more slowly than for peers. This dynamic will constrain topline revenue growth and could lead to earnings disappointments over the long term.
  
• The rising mainstream popularity of alternative lodging providers such as Airbnb and VRBO continues to disrupt traditional hotel demand, putting sustained pressure on room pricing and eroding market share for hotel chains like Scandic, which could severely compress net margins and profitability if pricing power is lost in core markets.
  
• Scandic remains highly exposed to labor market risks: ongoing labor shortages and persistent wage inflation in hospitality are likely to cause sustained increases in operating costs, leading to further erosion in net margins irrespective of revenue growth.
  
• The planned Dalata acquisition notably increases Scandic's debt load and geographic concentration in a cyclical sector, amplifying financial and operational leverage at a time when heightened regulatory burdens and tightening compliance requirements across Europe are set to drive up costs. This combination makes future earnings and cash flows increasingly volatile and less predictable.
  
• Accelerating consumer demand for sustainable accommodations is putting increased pressure on Scandic to invest heavily in upgrading legacy properties to meet stricter environmental standards. This will likely require higher ongoing capex that will depress free cash flow and limit capacity for dividends or buybacks, reducing the potential for per-share earnings growth over the long term.

Scandic Hotels Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Scandic Hotels Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Scandic Hotels Group's revenue will grow by 3.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.3% today to 3.5% in 3 years time.
• The bearish analysts expect earnings to reach SEK 838.9 million (and earnings per share of SEK 3.98) by about July 2028, up from SEK 723.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 23.0x on those 2028 earnings, down from 24.1x today. This future PE is greater than the current PE for the GB Hospitality industry at 12.7x.
• 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 10.11%, as per the Simply Wall St company report.

Scandic Hotels Group Future Earnings Per Share Growth

Risks

• The planned acquisition of Dalata Hotel Group stands to significantly expand Scandic's footprint into attractive markets like Ireland and the UK, both of which exhibit higher occupancy rates, RevPAR, and robust tourism growth compared to the Nordics, which should support long-term revenue and earnings growth.
  
• Scandic's strong focus on sustainability, digitalization (e.g., new website launches and proprietary platforms), and guest-centric innovation aligns with long-term secular trends-such as rising eco-conscious tourism and digital-first travelers-positioning it to capture premium demand and deliver higher average daily rates with improved net margins over time.
  
• Strategic asset-light expansion, including management and franchise contracts, continues alongside organic pipeline growth (~5% net portfolio growth), which enables increased room capacity without a proportionate increase in capital expenditure, thus supporting scalable revenue growth and improved returns on equity.
  
• The company's robust cash generation and disciplined financial management (net debt reduction, strong free cash flow, and operational efficiency measures) give it capacity to fund growth initiatives and weather cyclical downturns, reducing risk to earnings and enabling continued dividend payments or future buybacks.
  
• Scandic is capitalizing on long-term secular trends such as urbanization, increased leisure and bleisure travel, and positive event-driven demand across its markets, which supports higher occupancy and potential revenue growth; early signs of recovery in underperforming regions (e.g., Finland), as well as sustained strength in Norway and expanding tourism in Northern markets, further improve the long-term outlook for revenue and cash flow.

Valuation

• The assumed bearish price target for Scandic Hotels Group is SEK55.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Scandic Hotels Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK115.0, and the most bearish reporting a price target of just SEK55.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be SEK24.1 billion, earnings will come to SEK838.9 million, and it would be trading on a PE ratio of 23.0x, assuming you use a discount rate of 10.1%.
• Given the current share price of SEK81.0, the bearish analyst price target of SEK55.0 is 47.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.