North American Paperboard Transition Will Strengthen Future Profitability

Key Takeaways

• Transition to paperboard production in North America offers revenue growth potential and strengthens future earnings through improved efficiencies.
  
• Price increases and stabilized costs are expected to enhance net margins, supporting financial flexibility and growth.
  
• Challenging market conditions and high costs in Europe and North America could impact Billerud's revenue and margins with high uncertainty ahead.

Catalysts

Provides paper and packaging materials worldwide.

• Billerud's North American operations have significant upside potential from the evolution towards paperboard production and commercializing paperboard grades, which can drive revenue growth as the transition progresses.
  
• The announced and anticipated price increases across product categories such as liquid packaging board, containerboard, and sack paper are expected to positively impact net margins by offsetting cost inflation, particularly in Q2 2025 and beyond.
  
• The company’s efficiency enhancement program is nearly complete, having outpaced original targets with over SEK 840 million delivered in cost savings during 2024. This underpins future earnings improvement as higher efficiencies are achieved.
  
• The stabilization of pulpwood costs and high inventory levels provide a more predictable cost structure, which can improve net margins by reducing input cost volatility moving forward.
  
• Billerud's solid balance sheet, combined with ongoing strategic capital expenditures targeted toward North American paperboard production, positions it well for future earnings growth while maintaining financial flexibility.

Billerud Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Billerud's revenue will grow by 1.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.0% today to 5.3% in 3 years time.
• Analysts expect earnings to reach SEK 2.5 billion (and earnings per share of SEK 9.85) by about April 2028, up from SEK 1.7 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as SEK2.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.5x on those 2028 earnings, up from 14.2x today. This future PE is greater than the current PE for the GB Packaging industry at 13.8x.
• 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 5.03%, as per the Simply Wall St company report.

Billerud Future Earnings Per Share Growth

Risks

• Billerud's European region is experiencing challenging market conditions, with slow consumer demand for many categories and high costs for pulpwood, which could impact revenue and net margins.
  
• The company faces uncertainty regarding potential tariffs in North America, which could disrupt their supply chain and lead to increased costs for imported input materials, affecting net margins.
  
• The cartonboard and coated liner categories in Europe are suffering from weak consumer demand and oversupply, potentially leading to lower prices and revenue growth issues in these segments.
  
• Despite optimistic outlooks, Billerud acknowledges high uncertainty heading into 2025, which could impact price and mix improvements aimed at offsetting cost inflation, affecting net earnings.
  
• There is a risk of temporary volume reductions and high inventory levels, particularly in liquid packaging board, which could lead to lower sales and revenue in the short term.

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 SEK46.0 billion, earnings will come to SEK2.5 billion, and it would be trading on a PE ratio of 14.5x, assuming you use a discount rate of 5.0%.
• Given the current share price of SEK99.7, the analyst price target of SEK123.5 is 19.3% 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.