US Containerboard Production And Paperboard Investments Will Strengthen Future Markets

Key Takeaways

• Implementation of the Way Forward strategy is driving revenue and margin growth, with positive EBITDA and EBIT results.
  
• Strategic local production of containerboard in the U.S. and capital investments in North America are set to boost future earnings.
  
• Uncertain tariffs, currency impacts, and product challenges could disrupt Billerud's revenue and margins amid fluctuating demand and significant maintenance expenses.

Catalysts

Provides paper and packaging materials worldwide.

• The implementation of the Way Forward strategy in 2025 is already showing positive results, with significant EBITDA and EBIT improvements. This is expected to continue driving revenue and margin growth in the future.
  
• The company's milestone of producing and selling locally-produced containerboard in the U.S. is a strategic move to capture market share in the North American market, potentially boosting revenue growth.
  
• The capital investment of SEK 1.4 billion in North America, including upgrades at Escanaba mill and Quinnesec mill, aims to enable large-scale production of paperboard, positioning Billerud for future earnings growth.
  
• Expected price increases in key markets, such as containerboard and sack and kraft segments in Europe and coated freesheet reels in North America, are anticipated to enhance revenue and improve operating margins.
  
• Billerud's positioning to capitalize on potential pricing opportunities from import tariffs in North America, along with lower input costs in Q2, is likely to positively impact both revenue and net margins.

Billerud Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Billerud's revenue will decrease by 0.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.2% today to 5.7% in 3 years time.
• Analysts expect earnings to reach SEK 2.6 billion (and earnings per share of SEK 9.35) by about May 2028, up from SEK 1.8 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.8x on those 2028 earnings, up from 13.7x today. This future PE is greater than the current PE for the GB Packaging industry at 13.5x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.0%, as per the Simply Wall St company report.

Billerud Future Earnings Per Share Growth

Risks

• The potential long-term impact of tariffs on trade flows remains uncertain, which could disrupt the competitive landscape and lead to unpredictable financial outcomes, potentially affecting revenue and margins.
  
• While there is an expectation of increased sales prices and lower input costs, there is also significant uncertainty regarding consumer demand, particularly in North America, which could impact revenue and profit stability.
  
• The strengthening of the Swedish krona could negatively affect the competitiveness of Billerud's exports, which may lead to increased costs and potentially lower margins if market positioning is adversely affected.
  
• There are ongoing challenges in specific product categories, such as consumer luxury cartonboard, where slower demand and increased capacity could pressure sales volumes and profit margins.
  
• Maintenance shutdowns, particularly in Region Europe, are anticipated to incur substantial costs, projected at $380 million in Q2, which could affect net earnings and overall profitability.

Valuation

• The analysts have a consensus price target of SEK123.5 for Billerud 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 SEK140.0, and the most bearish reporting a price target of just SEK100.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK45.5 billion, earnings will come to SEK2.6 billion, and it would be trading on a PE ratio of 13.8x, assuming you use a discount rate of 5.0%.
  
• Given the current share price of SEK101.8, the analyst price target of SEK123.5 is 17.6% 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.