Price Erosion And Overcapacity Will Plague European Markets

Key Takeaways

• Declining demand for paper products and rising competition are eroding Billerud's market share, compressing margins, and threatening long-term revenue growth.
  
• Higher input costs, supply chain disruptions, and diminishing environmental advantages will depress profitability and limit the company's pricing power.
  
• Geographic diversification, innovation in packaging, cost discipline, and sustainability trends position Billerud for resilient profitability and long-term growth despite regional and cyclical challenges.

Catalysts

Provides paper and packaging materials worldwide.

• The persistent decline in demand for conventional paper-based products, fueled by the accelerating shift of both consumers and businesses toward digital alternatives, is eroding Billerud's addressable market and causing sustained volume declines in Europe. This ongoing contraction directly undermines revenue growth and intensifies the risk of structural overcapacity that will weigh on future earnings.
  
• Intensifying competition from low-cost Asian and local producers, particularly in liquid packaging board and cartonboard, is driving price erosion in Billerud's core markets. As overcapacity builds in Europe and regional competitors in Asia gain share, Billerud faces persistent downward price pressure and weaker operating rates, which will compress net margins for the foreseeable future.
  
• The continued rise in geopolitical tensions, trade barriers, and tariff-driven changes to global trade flows are amplifying supply chain uncertainty and prompting exported volumes to be redirected back into already-oversupplied European markets. This disruption is expected to result in prolonged underutilization of production assets and chronic inefficiency, further depressing profitability and return on capital.
  
• The move toward more energy-intensive production processes-combined with ongoing volatility in energy prices and tightening emissions regulations-exposes Billerud to structurally higher input costs. Without the ability to fully pass these costs onto customers in weak demand environments, future net margins will be compressed, and free cash flow generation will be increasingly challenged.
  
• Accelerated advancements in plastic recycling technologies alongside regulatory acceptance of recycled plastics are reducing the relative environmental advantage of fiber-based packaging. As the eco-premium that once supported Billerud's pricing power diminishes, long-term top-line growth and ability to command premium prices will deteriorate, increasing the risk of below-market returns for shareholders.

Billerud Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Billerud compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Billerud's revenue will decrease by 0.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 4.2% today to 3.6% in 3 years time.
• The bearish analysts expect earnings to reach SEK 1.6 billion (and earnings per share of SEK 6.45) by about July 2028, down from SEK 1.8 billion 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 15.2x on those 2028 earnings, up from 11.4x today. This future PE is greater than the current PE for the GB Packaging industry at 11.4x.
• 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 5.25%, as per the Simply Wall St company report.

Billerud Future Earnings Per Share Growth

Risks

• Continued robust performance and margin expansion in North America-evidenced by six consecutive quarters of margin improvement and an EBITDA margin reaching 22 percent-demonstrate that geographic diversification may underpin future group earnings and offset prolonged regional weakness elsewhere, supporting overall profitability.
  
• Strong progress in shifting the North American product portfolio toward higher-margin packaging materials, combined with tangible milestones such as rising sales volumes of new products and broad interest from both new and existing customers, suggest that innovation and portfolio evolution could drive revenue growth and improve the company's long-term margin structure.
  
• Strategic and disciplined management of working capital, record cash conversion rates, and maintenance of low leverage-alongside a clear focus on cost discipline-even during tough European conditions, indicate the company's robust ability to protect and potentially enhance net margins and free cash flow despite cyclical downturns.
  
• Declining pulpwood and energy input costs, especially in core Nordic and North American operations, are likely to alleviate margin pressures and boost earnings over the mid to long term as these reductions fully flow through the income statement.
  
• Secular sustainability trends, regulatory momentum against plastic packaging, and positive brand and consumer sentiment toward renewable and recyclable packaging solutions are expected to structurally expand Billerud's addressable market and support premium pricing, thereby bolstering revenues and supporting favorable long-term growth prospects.

Valuation

• The assumed bearish price target for Billerud is SEK84.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Billerud'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 SEK128.0, and the most bearish reporting a price target of just SEK84.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be SEK44.3 billion, earnings will come to SEK1.6 billion, and it would be trading on a PE ratio of 15.2x, assuming you use a discount rate of 5.2%.
• Given the current share price of SEK84.75, the bearish analyst price target of SEK84.0 is 0.9% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that the bearish analysts believe on average, the company is fairly priced.
• 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.