Forest Assets And Normalizing Pulpwood Costs Will Drive Stronger Long-Term Earnings Power

Catalysts

About Holmen

Holmen is a Swedish forest and renewable materials group that manages extensive forest assets and turns them into profitable wood products, paperboard, paper and energy.

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

• Gradual normalization and decline in pulpwood prices is expected to reduce input costs into Holmen's integrated Board and Paper operations. This may expand division margins and support higher earnings as the lagged cost relief flows through the income statement.
• Holmen's large forest base and disciplined harvesting strategy position the company to capture long term value from structurally tight high quality sawlog supply. This underpins asset values and may support resilient returns on capital from the Forest division.
• Ongoing optimization of energy usage and flexible curtailment in Board and Paper, combined with improving Nordic transmission capacity over time, may enhance returns from Holmen's renewable power portfolio and help sustain structurally lower unit energy costs, lifting net margins.
• Capacity rationalization and conversions in European graphic paper, together with Holmen's focus on profitable operating rates rather than volume, are likely to tighten the market balance and may support stable to firmer pricing, underpinning cash generation and EBIT in the Paper business.
• Exposure to higher value added solid bleached board and book paper grades, which serve more resilient packaging and publishing niches, may allow Holmen to defend pricing better than the broader market and support long term revenue growth and margin stability.

Assumptions

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

• The bullish analysts are assuming Holmen's revenue will grow by 1.2% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 12.2% today to 13.0% in 3 years time.
• The bullish analysts expect earnings to reach SEK 3.1 billion (and earnings per share of SEK 21.58) by about December 2028, up from SEK 2.9 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as SEK2.3 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 25.2x on those 2028 earnings, up from 18.6x today. This future PE is greater than the current PE for the GB Forestry industry at 21.1x.
• The bullish 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 6.49%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistently weak global demand for wood products in key markets such as the U.S. and China, combined with ongoing price pressure of 5 to 10 percent and production curtailments at Swedish sawmills, could keep the Wood Products division loss making for an extended period, weighing on group revenue growth and dragging on overall earnings.
• Structurally low electricity prices in northern Sweden due to locked in power and limited transmission capacity, together with high imbalance cost risks and wind power curtailments, may mean the Renewable Energy segment remains loss making, undermining the long term value of Holmen's power assets and limiting improvement in net margins.
• Industry overcapacity and subdued demand in both board and graphic paper, with more capacity needing to be closed and increasing competition for marginal volumes, could lead to renewed price erosion when contracts are renegotiated, pressuring Board and Paper utilization rates and compressing division EBIT and group operating margins.
• Stubbornly high sawlog prices in southern Sweden, coupled with bark beetle damage, drought impacts and intense competition for logs, may keep raw material costs misaligned with selling prices, forcing deeper production cuts and impairments in Wood Products and constraining profitability and return on capital employed.
• Geopolitical and trade shifts, including U.S. tariffs on wood products and board and the risk of excess Chinese capacity or repatriated European tonnes increasing supply pressure in Holmen's markets, could further weaken pricing power across segments and limit the company's ability to grow revenue and sustain current earnings levels.

Valuation

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

• The assumed bullish price target for Holmen is SEK450.0, which represents up to two standard deviations above 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 bullish 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 bullish analyst cohort, you'd need to believe that by 2028, revenues will be SEK24.2 billion, earnings will come to SEK3.1 billion, and it would be trading on a PE ratio of 25.2x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of SEK343.8, the analyst price target of SEK450.0 is 23.6% 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.