Koskisen Extensive Report: Toward a cyclical turn supported by investments

Translation: Original published in Finnish on 1/16/2025 at 8:01 am EET

We reiterate our EUR 7.25 target price and Reduce recommendation for Koskisen. Last year, Koskisen has carried out major investments, especially in the sawmill business, the benefits of which we suspect will only be fully visible in the near term. In addition, Koskisen's performance should gain traction as global construction recovers from the current weak cycle along with declining interest rates. However, we believe that this is already priced in the stock, as most valuation methods indicate that the share price is still correct.

A long-standing wood processing company from the mechanical forest industry

Koskisen is divided into the Sawmill Industry and Panel Industry, where the main products are softwood sawn timber, processed timber, birch plywood and chipboard. The company’s entire production is in Finland. About 70% of the Group's revenue comes from Europe and both businesses (and especially the Sawmill Industry) are cyclical and volume-driven by nature. Koskisen's market is international and grows slowly organically but is large relative to the size of the company. With its quality strategy, Koskisen aims to find pockets on the market where customers value highly customized, high-quality products and accept a price premium on them. We believe the competitive dynamics of the sawmill sector are largely brutal and the margins are thin, whereas in the Panel Industry, with the products’ higher value-added, we believe the average profitability potential of the segment is better. Koskisen's main risks are demand sensitive to economic development, price fluctuations, tightening competition, and the structurally tight timber market in Finland. Koskinen’s target is a revenue of 500 MEUR in 2027 and an average EBITDA % of 15%. In our view, the growth target requires corporate restructuring in structurally fragmented sectors. We consider the margin target challenging, considering the structural profitability levels of the company’s businesses.

We expect earnings growth driven by market recovery and investments

Koskisen’s demand outlook is supported by several drivers, like the growing popularity of ecological wood construction. Cyclically, the construction market has been in a slump in recent years, but the fall in interest rates should gradually revive demand in both segments in the coming years. In addition, there is a significant supply disruption in the Panel Industry in Europe, the root cause of which is Russia's war of aggression in Ukraine. The investments by the company in the early 2020s, especially in the Sawmill Industry, are also only now starting to bear fruit. Therefore, we expect Koskisen’s earnings trend, which made an upturn in Q3’24, to remain on the same path in the next few years. In our forecasts, the company's revenue grows on a volume-driven basis by approximately 10% per year until 2027, and the adjusted EBITDA % gradually increases from 9% in the last 12 months to 10-11%. In both units, margins are significantly limited by Finland’s tight timber market and, consequently, high log prices.

We feel the price tag is on the right level

Koskisen’s 2024 and 2025 EV/EBITDA ratios are around 8x and 6x, and the P/B ratio (2024e) is around 1.1x. The multiples are largely within the ranges we accept, taking into account the company's estimated return on capital and risk profile. The DCF value is also around the current share price level with our current conservative parameters. Thus, Koskisen's expected return based on earnings growth, falling multiples (Q3'24 LTM P/E 18x) and a dividend of around 4% is, in our view, below the required return. We maintain our cautious stance on the stock, although there could be leverage in the medium term if the European construction and economic recovery were to surprise positively during 2025-2026.