Investments In Forestry And Renewable Energy Will Secure Future Productivity

Key Takeaways

• Strategic investments and increased delivery volumes in key segments could enhance productivity and stabilize supply, potentially boosting future revenue and margins.
  
• High self-sufficiency in raw materials and expansion in renewable energy projects may protect net margins and improve earnings stability.
  
• Increased global uncertainty and currency fluctuations may hinder Svenska Cellulosa Aktiebolaget's revenue, with potential challenges across Wood, Pulp, and Renewable Energy segments.

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.

• Strategic investments in Obbola, Ortviken, and Gothenburg are expected to enhance productivity and cash flow generation, potentially increasing future revenue and earnings.
  
• Expected continued price increases in SCA's industrial segments, such as containerboard and pulp, driven by cost pressures and market demand, could boost revenue and margins.
  
• Increased harvesting levels and higher delivery volumes within the Forest segment may stabilize wood supply, potentially leading to improved earnings and margins.
  
• SCA's high self-sufficiency in wood raw materials helps mitigate negative effects from escalating raw material costs, which could protect or improve net margins.
  
• Expansion in renewable energy projects, such as wind power, combined with a positive long-term outlook despite current challenges, may improve future earnings stability and margins.

Svenska Cellulosa Aktiebolaget Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Svenska Cellulosa Aktiebolaget's revenue will grow by 1.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.9% today to 20.8% in 3 years time.
• Analysts expect earnings to reach SEK 4.9 billion (and earnings per share of SEK 7.04) by about May 2028, up from SEK 3.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting SEK6.2 billion in earnings, and the most bearish expecting SEK4.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.2x on those 2028 earnings, up from 24.1x today. This future PE is greater than the current PE for the GB Forestry industry at 22.4x.
• 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 7.33%, as per the Simply Wall St company report.

Svenska Cellulosa Aktiebolaget Future Earnings Per Share Growth

Risks

• Increased global uncertainty due to U.S. tariffs and trade tensions could negatively impact global demand and the business climate, which may hinder revenue growth.
  
• A slower construction sector with low new building starts could lead to reduced demand for solid-wood products, impacting SCA's revenue and net margins in the Wood segment.
  
• The risk of losing market share in the U.S., especially for pulp due to higher tariffs than Canadian suppliers, could adversely affect SCA's earnings and revenue in the Pulp segment.
  
• Currency fluctuations, especially the strengthening of the Swedish krona against USD and euro, could have negative effects on SCA's revenue and earnings due to unfavorable exchange rates.
  
• The challenging market for Renewable Energy, with anticipated low refining margins and bio premiums, could negatively impact revenue and net margins in this segment due to high market volatility.

Valuation

• The analysts have a consensus price target of SEK143.833 for Svenska Cellulosa Aktiebolaget 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 SEK162.0, and the most bearish reporting a price target of just SEK106.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK23.7 billion, earnings will come to SEK4.9 billion, and it would be trading on a PE ratio of 25.2x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of SEK125.3, the analyst price target of SEK143.83 is 12.9% 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.