2023-11-26 03:33:21 ET
Summary
- Holmen AB is a vertically integrated timber player with its own forests and production of paper, paperboard, and wood products.
- Q3 results showed declines in operating profit and EBITDA, except for the timber segment which grew incrementally thanks to tight supply.
- The company faces challenges in the paperboard and wood products segments due to slowing demand and maintenance shutdowns, while the renewable energy segment suffered on excess supply.
- In general, a weaker economy will continue to hit this business, and a 20x PE when the company has possibly not seen the worst of it yet is expensive.
Holmen AB ( OTCPK:HLMMF )( OTCPK:HLMNY ) is a vertically integrated timber player. In addition to sustainably managing their own forests in Sweden, which is a country abundant with forests, they produce their own products further up the value chain from their own forests such as paperboard, paper and also wood products. Harnessing rivers, they are also somewhat vertically integrated on the energy side with hydropower. Profits were mostly being supported by the timber business, as everything else suffered on both oversupply and insufficient demand. The issue is we think the recession is still building, and therefore current multiples are too high.
Q3 Breakdown
Here are the overall highlights for the quarter :
YoY the declines were not unmeaningful in operating profit and EBITDA. The only segment that actually managed to grow incrementally was the timber segment denoted forests.
Prices were up, as were volumes YoY for the Q3 results. EBITDA grew almost 33%. Demand was solid, although there was some slowing down of demand in the industry, but Holmen benefits because supply was still scarce, owing the fact that there are massive reserves in the walled off Russia . With no issues in its own supply it could fill that quite substantial market shortfall itself even though the pie has shrunk. Strong pulp prices reflect the demand for pulpwood, and log prices also went up.
This is where things get a little rougher, as the rest of the segments are clearly more levered to the extent of industrial and consumer demand. Paperboard wasn't so bad, but demand slowed down and there was also destocking activity, so supply wasn't great as well. The company also did pretty frequent maintenance this year which affected volumes substantially, and that was a meaningful driver of overall declines. There's going to be another maintenance related closure in Q4, so the EBITDA is going to see further declines YoY, but better to do the maintenance now while the market is quite weak, allowing for time for the destocking to be fully completed.
Paper is a bit of a different story in terms of prices. Prices have actually gone up in averages YoY thanks to reopening, as a lot of these markets have been levered to the end of the pandemic. Also, in general these prices had to be lifted by producers to pass through expensive energy costs.
Holmen produces some of its own energy and can limit the effects from cost inflation. However, the inflationary pressures overall of chemicals and other inputs, including of pulpwood which has gone up in price to benefit their forest segment, cannot be fully passed on in a commodity market like this and EBITDA therefore fell YoY.
Also, volumes were affected YoY due to production curtailments, which would have given an additional boost to profits had they not occurred.
Wood products performed badly in line with lumber markets globally. There is an excess supply situation, and while large projects were still underway, where we've in general been seeing strong activity in what could be called megaprojects , major pressure on the housing sector, particularly in Sweden itself but also reflective of the general pressure in housing markets due to higher rates, have been a problem for a large portion of Holmen's end markets here.
The last segment is renewable energy, which performed badly on plentiful rainfall YoY, filling reservoirs and meaning plentiful supply of electricity generation from hydropower sources. While EBITDA declines here were substantial, it had come also from an unusual decline in volumes which made the impact especially bad. However, any of the declines in prices were passed as benefits into the other segments which would have seen limited energy input inflation as a result.
Bottom Line
The problem is the multiple. We don't really imagine that the situation gets particularly better from here in terms of pricing and volumes across all the segments. We don't have high hopes for real estate demand, we also aren't confident in the European consumer and think that things will worsen over the next 6 months almost assuredly. This may start passing through into the timber business, although the supply issues there at least look enduring. If we're being generous and annualise current EPS, we are looking at PEs above 20x. It's simply too high considering headwinds and economic risks.
For further details see:
Holmen: Integrated Timber And Lumber Company Manages Commodity Downturn