Regulatory Hurdles And Global Competition Will Squeeze Margins Despite Renewables

Key Takeaways

• Structural decline in demand and weak transition to higher-value products threaten long-term growth and profitability, leaving earnings vulnerable to commoditization and competition.
  
• Heightened regulatory, environmental, and regional supply chain risks could increase costs and disrupt operations, further pressuring margins and business resilience.
  
• Strategic investments in mills, forest assets, and renewable energy projects are driving productivity, margin expansion, and positioning SCA for resilient, sustainable long-term 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.

• Global digitalization continues to drive structural declines in demand for printing and publication paper, while the company remains exposed to these segments, which is expected to severely limit long-term revenue growth and reduce overall profitability.
  
• Intensifying regulatory pressure and consumer expectations around environmental sustainability are likely to force stricter environmental compliance requirements, leading to higher costs and reduced operational flexibility, which could cut into long-term net margins.
  
• Poor progress in shifting away from commodity-grade products toward higher-value or more innovative segments risks the company becoming increasingly subject to global commoditization, further suppressing earnings growth and return on invested capital over time.
  
• Over-reliance on Nordic forests exposes SCA to escalating risks of regional disease outbreaks, pest infestations, and severe climate change events, any of which could compromise supply chain stability and erode the reliability of revenue generation.
  
• The rise of competitors in lower-cost regions such as Latin America and Asia threatens to erode market share and compress pricing power in core business lines, placing long-term pressure on both sales volumes and EBITDA as a result of global competition.

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 0.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 16.5% today to 20.8% in 3 years time.
• The bearish analysts expect earnings to reach SEK 4.6 billion (and earnings per share of SEK 6.61) by about August 2028, up from SEK 3.8 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 19.1x on those 2028 earnings, down from 23.9x today. This future PE is lower than the current PE for the GB Forestry industry at 21.0x.
• 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 6.86%, as per the Simply Wall St company report.

Svenska Cellulosa Aktiebolaget Future Earnings Per Share Growth

Risks

• SCA's substantial strategic investments, especially in the Bollsta sawmill and Obbola Containerboard mill, have already started to drive higher productivity and are expected to continue boosting both delivery volumes and EBITDA margins, supporting future earnings growth.
  
• Despite near-term volatility, long-term demand for sustainable, forest-based packaging (such as containerboard) remains strong due to underlying trends in e-commerce and retail, which could drive continued revenue expansion for SCA's high-quality containerboard segment.
  
• The company benefits from significant self-sufficiency in key raw materials through its vast forest assets, resulting in stable supply chains, more predictable input costs, and a stable platform for EBITDA growth as compared to less vertically integrated peers.
  
• SCA is approaching the completion of a major capex cycle, which is expected to lead to improved cash flow, lower capital intensity, and increased operational leverage-positively affecting net margins and free cash flow generation in coming years.
  
• Investments in renewable energy (including wind and biorefinery projects) and increased forest yields are positioning SCA to capitalize on long-term decarbonization and biomass demand trends, supporting diversified revenue streams and long-term margin resilience.

Valuation

• The assumed bearish price target for Svenska Cellulosa Aktiebolaget is SEK103.8, which represents two standard deviations below the consensus price target of SEK139.45. 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 SEK99.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be SEK22.4 billion, earnings will come to SEK4.6 billion, and it would be trading on a PE ratio of 19.1x, assuming you use a discount rate of 6.9%.
• Given the current share price of SEK128.55, the bearish analyst price target of SEK103.8 is 23.8% 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.