Bearish View Expects Board Overcapacity And Weak Power Prices To Pressure Margins

Catalysts

About Holmen

Holmen is a Swedish forest and renewable energy group that manages forest assets and produces wood products, paperboard, paper and power.

What are the underlying business or industry changes driving this perspective?

• Ongoing overcapacity in both board and graphic paper, together with weak demand that management describes as clearly below pre pandemic levels, can keep pressure on pricing and utilization, which would weigh on revenue growth and operating margins if this persists.
• Very low electricity prices in northern Sweden, limited transmission capacity and a loss making renewable energy segment, including wind curtailments and only modest price premia, point to a prolonged period of subdued power earnings and reduced contribution to group EBIT.
• Persistently high sawlog prices in southern Sweden, combined with weak global wood products demand and price pressure, have already led to curtailed sawmill production and stock write downs, which could further constrain Wood Products revenue and compress net margins if log costs do not ease.
• Global trade tensions, new tariffs into the U.S. on wood products, board and paper, and the risk of redirected volumes from Asia and North America back into Europe create a risk of tougher competition for Holmen’s export exposed grades, potentially affecting average selling prices and EBITDA.
• Elevated capacity in European board markets, coupled with negotiations on new volumes that already require price concessions for marginal tonnes, suggests that upcoming contract renewals could be settled on less favorable terms, limiting price realization and earnings resilience even if volumes hold.

Assumptions

This narrative explores a more pessimistic perspective on Holmen compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Holmen's revenue will remain fairly flat over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 12.2% today to 11.5% in 3 years time.
• The bearish analysts expect earnings to reach SEK 2.8 billion (and earnings per share of SEK 17.9) by about January 2029, down from SEK 2.9 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 19.0x on those 2029 earnings, down from 19.2x today. This future PE is lower than the current PE for the GB Forestry industry at 21.8x.
• The bearish analysts expect the number of shares outstanding to decline by 2.01% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.48%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Holmen reports a SEK 700 million group result for the quarter and a 15% return on capital employed for Wood and Paper over the first 9 months. This suggests that even under currently weak demand conditions the group is still converting its asset base into profit, and sustained returns at or near this level could support revenue and earnings more than a bearish share price view assumes.
• The company has distributed SEK 13 billion in dividends and buybacks over 5 years while keeping roughly the same debt to equity ratio. This points to balance sheet capacity and cash generation that could allow ongoing capital returns, supporting earnings per share and investor sentiment even if operating markets stay difficult.
• Forest segment profit of SEK 538 million in the third quarter, supported by price increases and higher harvesting volumes versus the same quarter last year, together with early signs that pulpwood prices are starting to decline, could improve cost leverage over time and underpin gross margins and net margins if lower input costs begin to feed through.
• Board and Paper are currently profitable with prices described as fairly stable and the paper business EBIT positive even without the SEK 250 million benefit from lower electricity costs. This indicates resilience in core industrial segments that could keep operating profit and group earnings steadier than implied by a strongly bearish thesis.
• Holmen runs its own hydropower and wind assets, is already back in production at the rebuilt Junsterforsen hydropower station and has been able to benefit from lower electricity costs in its mills. Any gradual improvement in Nordic power pricing or continued effective energy management would support EBITDA and net margins relative to expectations of ongoing loss making power operations.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Holmen is SEK300.0, which represents up to two standard deviations below the consensus price target of SEK364.11. This valuation is based on what can be assumed as the expectations of Holmen'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 SEK450.0, and the most bearish reporting a price target of just SEK300.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be SEK24.0 billion, earnings will come to SEK2.8 billion, and it would be trading on a PE ratio of 19.0x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of SEK354.4, the analyst price target of SEK300.0 is 18.1% lower.
  
• 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.