Investing in Timber Assets to Hedge Against Inflation

Companies with a high portion of real assets, such as timber or real estate, are typically defensive investments that can hedge against inflation in the long term. However, interest rates are equally important. Steeply rising rates can have a negative impact on both assets and cash flow.

For SCA and Holmen, with their core in timber assets, the interest rate environment in recent years has decreased the book value of the forests while also dampening demand for products from their operation-driven industrial activities. But prices for pulp, timber, and paperboard seem to have bottomed out, interest rates are falling – and the timber remains standing.

Valuing vast assets in the market is complex and regardless of the valuation method, it’s theoretical. To illustrate how the stock market values SCA’s and Holmen’s more operation-driven industrial activities, we have made a simplified calculation based on the numbers from the second quarter and the past twelve months.

Excluding the results from timber, SCA has generated approximately 1.1 billion SEK in profit after tax, while Holmen’s industrial activities have generated 1.8 billion SEK during the same period. Despite this, according to the calculation, there are small differences in the indicative values of the operations.

Considering historical figures in the calculation, it’s important to emphasize the timber companies’ bleak end to last year. A challenging period with high input costs and lowered selling prices. But tough times enable a future with simple comparison figures and profit growth – perfect for a forward-looking stock market.

Similar values – difference in profit

Similar indicative values on operations but clear differences in profit mean a valuation gap. According to the calculation, SCA’s industrial activities are valued at around 23 times earnings, and a corresponding calculation for Holmen means the industrial activities are valued at 14 times earnings.

According to estimates in Factset, SCA and Holmen, including the timber, are expected to increase profits by double-digit percentages next year. The highest expectations are on SCA with an estimated profit increase of 29 percent in 2025, which is also the simplest explanation for the current valuation gap.

The share price development for both companies is similar over ten years, with total returns adding up to almost 400 percent. Large values in the balance sheet, low indebtedness, industrial activities with increased demand, and high self-sufficiency rates are some of the reasons to own Holmen or SCA in the next ten years.

In the shorter term, a global shortage of companies’ raw materials, increased demand, and higher prices can benefit earnings in the operation-driven units. Falling interest rates will also increase the value of the timber – and the combination will have a positive effect on assets, cash flow, and results.

Strong Earnings Momentum – Short and Long Term

Both in the short and long term, SCA and Holmen have good prospects for strong earnings momentum, which should leave a mark on stock prices going forward.

Several major asset managers have recently increased their ownership in SCA, likely explained by sector allocation.

Holmen’s board, led by Fredrik Lundberg, has recently announced the repurchase of 3 million shares, likely due to one reason – the stock is considered cheap in relation to future earnings potential. And the board’s timing on previous buybacks is difficult for shareholders to criticize.

With a similar structure, trends driving demand, and valuation multiples on future expected earnings, it’s hardly worth having a clear favorite between SCA and Holmen.

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