On Thursday, BofA Securities adjusted its stance on Svenska Cellulosa Aktiebolaget SCA (SCAB:SS) (OTC: SVCBF), downgrading the company's stock from Buy to Neutral and revising the price target to SEK165 from SEK175. The adjustment comes after a reassessment of the company's earnings growth potential and a review of market valuations.
The downgrade by BofA Securities reflects a response to recent changes in the market, including a decline in pulp prices and a decrease in the valuation of the Swedish Forest market. These factors have led to the expectation of reduced near-term earnings growth for SCA. The analyst noted that SCA experienced a favorable period in the first half of 2024 due to higher pulp prices and benefited from market disruptions in Finland, such as port and rail strikes.
Despite the previous gains, the current valuation of SCA, trading at approximately 1x Price/Book (P/B) and 14.2x Enterprise Value/Earnings Before Interest, Taxes, Depreciation, and Amortization (EV/EBITDA) on a 12-month forward basis, is now considered fair when compared to historical standards. This assessment takes into account the slowdown in both pulp prices and forest values.
The methodology behind the price objective remains unchanged, with a valuation model that includes a 9x EV/EBITDA multiple on industrial EBITDA plus forest market value, less a 20% holding company discount. However, due to the roughly 11% lower EBITDA outlook and limited upside to the new price target, the recommendation has been downgraded.
The revised price target of SEK165 signifies a more conservative outlook on the stock's potential, aligning with the analyst's view of fair valuation given the current market circumstances.
InvestingPro Insights
Adding to BofA Securities' analysis, recent data from InvestingPro provides further context to SCA's financial position and market performance. The company's market capitalization stands at $9.84 billion, reflecting its significant presence in the forestry and paper products industry.
InvestingPro data shows that SCA's P/E ratio (adjusted) for the last twelve months as of Q2 2024 is 67.75, which aligns with an InvestingPro Tip indicating that the stock is "Trading at a high earnings multiple." This high multiple suggests that investors are pricing in expectations of future growth, despite the recent downgrade.
Another relevant InvestingPro Tip notes that SCA has been "Profitable over the last twelve months," with a gross profit of $1.45 billion and an operating income of $218.08 million for the same period. This profitability, combined with a dividend yield of 1.87%, may provide some reassurance to investors in light of the downgrade.
The company's revenue for the last twelve months as of Q2 2024 was $1.98 billion, with a slight decline of 3.07% year-over-year. However, the quarterly revenue growth for Q2 2024 showed a positive 12.88% increase, indicating some resilience in SCA's business model.
For investors seeking a more comprehensive analysis, InvestingPro offers additional tips and insights. Currently, there are 5 more InvestingPro Tips available for SCA, which could provide valuable perspective on the company's financial health and market position.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.