Digitalization And Rising EU Hurdles Will Contract Paper Demand

Key Takeaways

• Ongoing digitalization, alternative materials, and global competition threaten SCA's traditional markets and long-term revenue growth.
  
• Environmental regulations and regional risks drive up costs, compress margins, and expose the company to supply chain disruptions.
  
• Strategic investments, operational self-sufficiency, resilient demand, and expansion into renewables position the company for stronger margins, diversified revenues, and sustainable growth.

Catalysts

A forest products company, develops, manufactures, and sells forest, wood, pulp, and containerboard products in Sweden, the United States, Germany, the United Kingdom, rest of Europe, Asia, and internationally.

• Ongoing digitalization and shifts away from paper-based communication continue to erode traditional pulp and paper demand, and even recent volume gains risk reversal as more consumers and businesses adopt electronic alternatives, creating a long-term drag on SCA's core revenues.
  
• Intensifying environmental regulation and the specter of rising carbon pricing directly threaten SCA's cost structure, as stricter EU land-use and emissions policies are likely to increase compliance costs and restrict access to forest assets, leading to ongoing margin compression and reduced competitiveness.
  
• The company's concentrated forestry asset base in Northern Europe remains vulnerable to regional risks such as pest infestations and abrupt policy shifts; these factors could disrupt supply, inflate costs, and erode the reliability of future revenue streams.
  
• Rapid advances in alternative materials, including bioplastics and fully recyclable synthetics, may displace wood-based products in packaging and construction markets, reducing SCA's addressable market and putting sustained downward pressure on sales growth and long-term profitability.
  
• Heightened global competition, particularly the expansion of low-cost pulp and forestry producers in South America and Asia, will intensify price wars and limit SCA's ability to maintain premium pricing, ultimately threatening top-line growth and return on capital employed.

Svenska Cellulosa Aktiebolaget Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Svenska Cellulosa Aktiebolaget compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Svenska Cellulosa Aktiebolaget's revenue will decrease by 0.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 15.9% today to 18.6% in 3 years time.
• The bearish analysts expect earnings to reach SEK 4.2 billion (and earnings per share of SEK 6.0) by about July 2028, up from SEK 3.6 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 21.1x on those 2028 earnings, down from 23.9x today. This future PE is greater than the current PE for the GB Forestry industry at 20.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.07%, as per the Simply Wall St company report.

Svenska Cellulosa Aktiebolaget Future Earnings Per Share Growth

Risks

• SCA has completed major strategic investments in production facilities (Obbola, Ortviken, Gothenburg), which are expected to boost productivity, operational efficiency, and cash flow generation, providing potential for higher revenue and growing profit margins in coming years.
  
• The company's high degree of self-sufficiency in wood raw materials helps it mitigate the negative impact of rising raw material costs, supporting net margins and offering a structural competitive advantage.
  
• Despite macroeconomic and trade uncertainties, SCA is seeing strong delivery volumes and the positive effects of recent price increases across key product lines, indicating resilience and potential for sustained revenue growth.
  
• The ongoing ramp-up of new capacity and improved operational productivity across segments are expected to further strengthen earnings and cost efficiency, which could enhance both revenue and net margins.
  
• SCA is expanding its activities in renewable energy (including a growing portfolio of wind power projects and solid biofuels), creating diversified revenue streams that may provide greater earnings stability and support higher long-term cash flow.

Valuation

• The assumed bearish price target for Svenska Cellulosa Aktiebolaget is SEK103.28, which represents two standard deviations below the consensus price target of SEK140.25. This valuation is based on what can be assumed as the expectations of Svenska Cellulosa Aktiebolaget'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 SEK162.0, and the most bearish reporting a price target of just SEK97.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be SEK22.6 billion, earnings will come to SEK4.2 billion, and it would be trading on a PE ratio of 21.1x, assuming you use a discount rate of 7.1%.
• Given the current share price of SEK124.0, the bearish analyst price target of SEK103.28 is 20.1% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.