Renewable Energy Upside And Packaging Shift At Braviken Mill Set To Boost Earnings

Key Takeaways

• Strategic investments in higher-value products and niche markets could enhance margins and stabilize pricing power over time.
  
• Potential transmission issue resolutions and strong financial positioning could amplify future revenue, dividends, and EPS growth.
  
• Rising raw material costs and low electricity prices threaten net margins and renewable energy segment revenues, amid weak demand and oversupply in the wood market.

Catalysts

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

• Holmen's renewable energy segment is facing low electricity prices due to transmission limitations, but any resolutions to these transmission issues could lead to higher electricity prices, benefiting revenue and net margins in the future.
  
• The company is investing in rebuilding one of its paper machines at the Braviken mill to produce packaging paper, which represents a strategic shift to higher-value products and could improve earnings and margins over time.
  
• Holmen is focusing on niche products within the Paper division, which may allow for greater market share in specialized segments, potentially leading to stable or improved pricing power and higher margins.
  
• The strong financial position, characterized by low net debt and past returns of capital to shareholders, indicates potential for future share buybacks or dividend increases, thereby influencing EPS growth.
  
• Despite current challenges with log prices, Holmen is banking on a future rebound in the Wood Products market, which could significantly impact revenue and alleviate current margin pressures once demand strengthens.

Holmen Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Holmen's revenue will grow by 2.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.1% today to 15.0% in 3 years time.
• Analysts expect earnings to reach SEK 3.8 billion (and earnings per share of SEK 24.05) by about January 2028, up from SEK 2.8 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as SEK3.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.0x on those 2028 earnings, down from 23.3x today. This future PE is lower than the current PE for the GB Forestry industry at 23.3x.
• Analysts expect the number of shares outstanding to decline by 0.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.94%, as per the Simply Wall St company report.

Holmen Future Earnings Per Share Growth

Risks

• Increasing raw material costs, particularly saw log prices, which are 50% higher than three years ago, could put pressure on net margins and profitability, especially for sawmills in southern Sweden where costs are extremely high.
  
• Low electricity prices, the lowest in Sweden in 20 years, could negatively impact revenues from the renewable energy segment, which is already facing challenges due to limited transmission capacity to other countries.
  
• Weak demand and oversupply in the wood products market, exacerbated by rising log costs, create a challenging environment that could suppress revenues and lead to potential losses, especially in the southern part of Sweden.
  
• Maintenance stop and reconstruction projects, especially in the Board and Paper division, are expected to impact profits by SEK 250 million in the fourth quarter, reducing quarterly earnings.
  
• The overcapacity and stable prices in the paper market, alongside reduced demand in the board market, particularly from luxury segments, create uncertainties that could affect future revenues and the ability to fully utilize production capacity.

Valuation

• The analysts have a consensus price target of SEK433.1 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 SEK480.0, 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 SEK25.2 billion, earnings will come to SEK3.8 billion, and it would be trading on a PE ratio of 22.0x, assuming you use a discount rate of 6.9%.
• Given the current share price of SEK419.6, the analyst's price target of SEK433.1 is 3.1% 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.