Nordic Credit Rating (NCR) said today that it had affirmed its 'BBB' long-term issuer rating on Sweden-based forestry company Södra Skogsägarna ekonomisk förening. The outlook is stable. The 'N3' short-term issuer rating and 'BBB' senior unsecured issue rating were also affirmed.
Rating rationale
The affirmation of the long-term rating reflects our expectations that Södra will maintain a strong balance sheet with low financial leverage in the face of weaker market conditions. Anticipated dividend payments and increased investments will likely not impact the company's key financial metrics in the near term. We do not currently expect the company's net cash position to become a permanent feature of its capital structure given its long-term financial targets. We could, however, revise our view of the company's capital structure if we see increased evidence that its financial risk profile is likely to remain strong through currently weak market conditions.
Our long-term issuer rating reflects the company's strong balance sheet, low financial leverage, and healthy cash flows. The rating also reflects Södra's robust long-term profitability, cost-efficient operations, and extensive geographic reach. We assess the company's liquidity as strong and believe that the current business model and ownership structure help to moderate risk.
The rating is constrained by the forestry sector's historical earnings volatility, which is mainly due to the cyclical markets for market pulp and sawn wood products. Although Södra's credit metrics are strong, its financial policy allows for higher leverage, which we reflect in our financial risk assessment. The rating is also constrained by Södra's exposure to homogenous end-products along with the large size of its customers, which effectively reduces the company's bargaining power. We view the company's relatively high customer concentrations, especially in its pulp sales, and its unhedged currency exposures as negative rating factors. Environmental, social and governance factors are assessed as neutral even though Södra, like its industry peers, is subject to recurring media scrutiny due to concerns about unsustainable harvesting and possible changes in EU regulations.
Stable outlook
The stable outlook reflects our expectations that Södra's financial profile will remain strong. In our view, the company's balance sheet is sufficiently strong to withstand weaker market conditions than at present. The outlook also reflects our view that Södra will maintain its conservative capital structure while substantially increasing investment levels. We expect market pulp prices to rebound and remain at high levels by historical standards whereas the market for sawn wood products is likely to recover by end-2024 due to lower supply and declining customer inventories.
We could raise the rating to reflect long-term improvement in operating conditions, with projected EBITDA margins above 12%. We could also raise the rating if the company maintains a strong financial risk profile throughout the current downturn. The rating could also be raised to reflect increased diversity through investments in new value-added products.
We could lower the rating to reflect a long-term net debt/EBITDA ratio above 2x. We could also lower the rating to reflect regulatory changes that have a negative effect on the company's business risk profile or weaken its credit metrics. Other negative rating factors include unexpected long-term mill outages that could negatively impact investments, costs and volumes.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BBB | BBB |
| Outlook: | Stable | Stable |
| Short-term issuer credit rating: | N3 | N3 |
| Senior unsecured issue rating: | BBB | BBB |
Contacts:
Gustav Nilsson, analyst, +46735420446, gustav.nilsson@nordiccreditrating.com
Elisabeth Adebäck, analyst, +46700442775, elisabeth.adeback@nordiccreditrating.com
Geir Kristiansen, analyst, +4790784593, geir.kristiansen@nordiccreditrating.com
The methodology documents used for this rating are NCR's Corporate Rating Methodology published on 8 May 2023, NCR's Rating Principles published on 14 Feb. 2024 and NCR's Group and Government Support Rating Methodology published on 14 Feb. 2024. For the full regulatory disclaimer please see the rating report.