Future Industrial Demand Will Boost Renewable Energy Prospects In Northern Sweden

Key Takeaways

• Renewable energy's future demand may boost Holmen's earnings due to potential industrial projects driving higher electricity prices.
  
• Forest valuation and wood price increases have significantly enhanced cash flow, suggesting possible long-term revenue growth.
  
• Rising timber and electricity costs, plus stagnant demand and geopolitical uncertainties, threaten Holmen’s profitability and revenue stability across multiple business segments.

Catalysts

Engages in forest, paperboard, paper, wood products, and renewable energy businesses in Sweden and internationally.

• The increasing gap between sawlog costs and pulpwood is a challenge, especially in south Sweden, but Holmen's strategic location and logistics management might help mitigate the impact, potentially stabilizing their revenue and net margins in the future.
  
• Renewable energy production in Northern Sweden is currently unprofitable due to low electricity prices, but future industrial projects requiring green energy may create demand, leading to higher electricity prices and improved earnings for Holmen's renewable energy division.
  
• The integrated Board and Paper division has shown promise in operational efficiencies and cost-competitiveness, potentially benefiting future revenue through increased market share and operating rates.
  
• Holmen's forest valuation adjustments and rising wood prices have boosted cash flow from harvesting by 80%, indicating potential long-term revenue growth if the current trend in wood prices continues.
  
• Holmen's strategic focus on maintaining and improving existing assets rather than expanding raw material consumption offers potential for higher returns on capital employed, which could support stronger earnings in the paper and board sectors.

Holmen Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Holmen's revenue will grow by 2.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.1% today to 14.2% in 3 years time.
• Analysts expect earnings to reach SEK 3.6 billion (and earnings per share of SEK 23.09) by about March 2028, up from SEK 2.9 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting SEK4.3 billion in earnings, and the most bearish expecting SEK3.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.5x on those 2028 earnings, down from 23.5x today. This future PE is lower than the current PE for the GB Forestry industry at 25.6x.
• Analysts expect the number of shares outstanding to decline by 0.98% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.28%, as per the Simply Wall St company report.

Holmen Future Earnings Per Share Growth

Risks

• Holmen faces rising timber costs, particularly in the south of Sweden due to spruce bark beetle infestation and regional price disparities, which could strain margins and reduce profitability in its wood products business.
  
• The forest industry is challenged by high electricity costs in regions like Germany, creating a competitive disadvantage for Holmen's energy-intensive operations, potentially impacting net margins in its paper production.
  
• Stagnant paper and board demand and increased industry capacity lead to low operating rates, risking profit margins as fixed costs are spread over fewer units sold.
  
• The energy market in northern Sweden currently suffers from excessive supply and low prices, diminishing profits in Holmen's renewable energy division and affecting overall earnings.
  
• Potential fluctuations in tariffs, trade policies, or global wood supply, including those related to geopolitical situations with Russia, could disrupt markets and reduce competitiveness, impacting overall revenue stability.

Valuation

• The analysts have a consensus price target of SEK431.556 for Holmen 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 SEK476.0, and the most bearish reporting a price target of just SEK389.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK25.6 billion, earnings will come to SEK3.6 billion, and it would be trading on a PE ratio of 22.5x, assuming you use a discount rate of 7.3%.
• Given the current share price of SEK426.4, the analyst price target of SEK431.56 is 1.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they 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.