Investments In Obbola, Ortviken, And Gothenburg Will Drive Future Performance Across Multiple Segments

Key Takeaways

• Strategic investments and new product ramp-ups are poised to enhance revenue and EBITDA across multiple segments in the coming years.
  
• Expanding renewable energy operations aligns with increasing European mandates, supporting long-term revenue growth.
  
• Rising wood costs, market declines, and operational issues threaten earnings, cash flow, and margins in renewable energy and pulp 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.

• SCA's strategic investments in Obbola, Ortviken, and Gothenburg are under ramp-up and expected to positively impact revenue and EBITDA in the coming years as full capacity is reached and efficiencies improve.
  
• The ongoing high demand for wood raw materials, coupled with SCA's ability to increase harvesting levels from its own forests, suggests potential for higher revenue in the Forest segment, improving both top-line growth and net margins.
  
• The new CTMP mill ramp-up is on track, and SCA's new products are well received in the market, indicating potential for increased Pulp segment sales and EBITDA, with an expected improvement in demand from China which could boost revenues.
  
• In Containerboard, the positive sales and EBITDA growth is partly driven by the new kraftliner paper machine's ramp-up, expected to reach full capacity by 2026, which should significantly contribute to revenue and earnings growth as operational efficiencies are realized.
  
• SCA continues to expand its renewable energy segment, with contributions from leasing land for wind power, positioning it for future revenue growth as European blending mandates for renewable fuels increase.

Svenska Cellulosa Aktiebolaget Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Svenska Cellulosa Aktiebolaget's revenue will grow by 2.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.7% today to 23.6% in 3 years time.
• Analysts expect earnings to reach SEK 5.5 billion (and earnings per share of SEK 7.84) by about December 2027, up from SEK 3.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting SEK 6.8 billion in earnings, and the most bearish expecting SEK 4.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.3x on those 2027 earnings, down from 26.4x today. This future PE is lower than the current PE for the GB Forestry industry at 25.1x.
• 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 7.11%, as per the Simply Wall St company report.

Svenska Cellulosa Aktiebolaget Future Earnings Per Share Growth

Risks

• The decline in the market for liquid biofuels and tall oil, partly due to reduced blending mandates and increased imports from China, presents a risk to the renewable energy segment, potentially affecting margins and future revenue growth.
  
• High operational and ramp-up costs in new projects like Obbola's kraftliner paper machine and the Gothenburg biorefinery may put pressure on near-term earnings and cash flow, affecting net margins until full capacity is reached.
  
• Increasing wood raw material costs are a significant expense, particularly impacting areas like pulp and containerboard, potentially squeezing profit margins if selling prices do not keep pace.
  
• High inventory levels and decreasing prices for pulp products, especially in the international markets like China, could lead to pressure on sales prices and reduced revenue in the Pulp segment if demand remains flat.
  
• Unplanned production stops, such as the one at Ostrand pulp mill, highlight operational risks that can result in significant financial impacts, such as the SEK 60 million loss, potentially affecting earnings and net profit.

Valuation

• The analysts have a consensus price target of SEK 155.62 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 SEK 185.0, and the most bearish reporting a price target of just SEK 109.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be SEK 23.4 billion, earnings will come to SEK 5.5 billion, and it would be trading on a PE ratio of 24.3x, assuming you use a discount rate of 7.1%.
• Given the current share price of SEK 137.9, the analyst's price target of SEK 155.62 is 11.4% 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.