New Production Capacity Is Expected To Improve Future Supply And Productivity

Key Takeaways

• Strategic investments in production capacity and forest management are expected to boost revenue, improve cash flow, and stabilize raw material supply.
  
• Price hikes in containerboard and pulp segments could enhance revenue and profitability if successfully implemented in the market.
  
• Rising raw material costs and weak demand in key segments could weigh on Svenska Cellulosa Aktiebolaget's profitability and earnings in the near term.

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 new production capacity, such as the new paper machine in Obbola and the new CTMP line at Ortviken, are expected to drive higher delivery volumes and productivity, which should boost revenue and cash flow in the coming years.
  
• The company's focus on increasing harvesting volumes from its own forests, anticipated to support a stable supply of raw materials, could improve net margins by mitigating the impact of raw material cost increases.
  
• Continued investments in forest land, particularly in the Baltics, and forest management are expected to enhance raw material supply and generate higher long-term cash flow, potentially increasing SCA's earnings.
  
• The gradual ramp-up of strategic investments in containerboard and pulp operations are projected to significantly contribute to EBITDA, which could drive earnings growth if market conditions remain favorable.
  
• Price increases announced in containerboard and pulp segments in response to cost pressures and improving demand outlooks could enhance revenue and stabilize profitability if these hikes are fully realized in the market.

Svenska Cellulosa Aktiebolaget Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Svenska Cellulosa Aktiebolaget's revenue will grow by 2.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.2% today to 24.0% in 3 years time.
• Analysts expect earnings to reach SEK 5.9 billion (and earnings per share of SEK 8.33) by about March 2028, up from SEK 3.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting SEK6.8 billion in earnings, and the most bearish expecting SEK4.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.6x on those 2028 earnings, down from 27.5x today. This future PE is lower than the current PE for the GB Forestry industry at 25.6x.
• 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 7.6%, as per the Simply Wall St company report.

Svenska Cellulosa Aktiebolaget Future Earnings Per Share Growth

Risks

• The company faces challenges from substantially higher costs related to wood raw materials, which could negatively impact net margins and earnings.
  
• There is a slow underlying market for solid wood products, with low demand potentially affecting revenues and margins in the Wood segment.
  
• Planned maintenance stops and ramp-up costs for new facilities such as Obbola could temporarily reduce profitability and EBITDA in the short to medium term.
  
• The European manufacturing industry's negative growth might decrease demand for containerboard, potentially lowering revenues in this segment.
  
• Volatility in renewable energy markets, including low refining margins and lower green premiums for biofuels, could continue to affect earnings in the Renewable Energy segment.

Valuation

• The analysts have a consensus price target of SEK157.75 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 SEK190.0, and the most bearish reporting a price target of just SEK120.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK24.4 billion, earnings will come to SEK5.9 billion, and it would be trading on a PE ratio of 23.6x, assuming you use a discount rate of 7.6%.
• Given the current share price of SEK142.7, the analyst price target of SEK157.75 is 9.5% 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.