Stora Enso Q2'24: Balanced level of earnings growth expectations priced in

This report is a summary translation of the report “Tuloskasvuodotuksia on hinnassa sopusuhtaisesti” published on 7/24/2024 at 11:00 pm EEST.

We reiterate Stora Enso's Reduce recommendation and our target price of EUR 11.50. Overall, the company's Q2 report was fairly neutral compared to our expectations, although we have made moderate negative changes to our near-term forecasts. In our view, the stock already has enough earnings growth expectations priced in (2025e: P/E 14x), given the relatively clear step-by-step turnaround and the short- and medium-term opportunities and risks in the operating environment. However, we believe the stock's downside potential is already quite limited given the balance sheet valuation and the upward earnings trend in the near term.

Operational performance was very close to forecasts

Stora Enso's revenue decreased by 3% to 2,301 MEUR in Q2, mainly due to plant closures. Growth in continuing operations was slightly positive. Stora Enso's Q2 adjusted EBIT increased by more than 300% to 161 MEUR, exactly in line with our and consensus forecasts. The divisions performed as expected (Biomaterials, Packaging Solutions) or better than our estimates (Forest, Packaging Materials and Wood Products), but this was offset by an ugly loss in the Other segment.

We only trimmed our forecasts slightly after the report

Stora Enso reaffirmed its guidance for the current year that the company's adjusted EBIT this year will be significantly higher than last year (2023: adj. EBIT: 342 MEUR). In Stora Enso's scale, "significantly higher" means an improvement of more than 50%. Our and consensus forecasts before the report expected EBIT to more than double, so the guidance remains loose, especially because of the floor-level comparison figure. However, we did not expect the company to refine its guidance, which was increased in May, in connection with the Q2 report.  Market commentary was cautiously optimistic given the news flow in the sector, and the turnaround appears to be progressing in most companies. In addition, the company's cost-cutting measures are progressing. However, following the Q2 report, we have slightly lowered our forecasts for Stora Enso for this year and the coming years, especially for Wood Products (still weak demand outlook in the construction industry) and Packaging Solutions (overcapacity). Adjusted EBIT forecasts fell by 0-5% and at the EPS level the decline was slightly deepened by a slight increase in financial cost forecasts. We still expect Stora Enso to improve to a passable level this year as the inventory trend reverses and the economic situation improves slightly with recovering volumes, increase in pulp prices, easing inflation (excluding timber) and savings. In the coming years, we expect further improvements in a gradually recovering economic environment, but we do not expect the company to achieve good results until 2026-2027.

Earnings improvement expectations are reasonably priced into the stock

Our projections for Stora Enso's earnings multiples for 2024 are high (2024e: adj. P/E 21x) and next year's adjusted P/E of 14x and EV/EBITDA of 8x look neutral. We expect dividend yields in the coming years to be at a satisfactory level of 3-4%. However, we believe that a P/B of 0.9x is already moderate, even if the valuation of the forest assets on the balance sheet is viewed through the lens of an equity investor's required returns. The DCF value is also roughly in line with the current share price. Overall, we believe that the stock is appropriately priced for a turnaround, and as a result, we do not consider the stock's expected return over a one-year horizon to be attractive. However, we do not believe the stock has significant downside potential given the balance sheet valuation and the earnings trend, which has turned in the right direction.