Nordic Credit Rating said today that it had raised its long-term issuer rating on Sweden-based forestry cooperative Södra Skogsägarna ekonomisk förening to 'BBB+' from 'BBB'. The outlook is stable. The short-term issuer rating was raised to 'N2' from 'N3' and the senior unsecured issue rating was raised to 'BBB+' from 'BBB'.
Rating rationale
The higher long-term rating reflects our view that Södra has emerged in good financial health from a cyclical low. The company's performance this year has been stable and it has a growing net cash position. Both earnings and cash flow have been stronger than we expected earlier in the year, and we now project EBITDA margins of around 11% through 2026 compared with around 8% previously. In addition, we now forecast EBITDA will remain stable at SEK 3.2 - 3.4bn annually through 2026 compared with our earlier expectations of SEK 2.2bn in 2024 to SEK 2.5bn in 2026. The company has stepped up investment, and we now expect free operating cash flows to exceed SEK 1bn annually through 2026.
In addition to the company's strong balance sheet and growing net cash position, the rating also reflects Södra's robust long-term profitability, cost-efficient operations, and extensive geographic reach.
The rating is constrained by the forestry sector's historical earnings volatility, which is mainly due to the cyclical markets for pulp and sawn wood products. It is also constrained by Södra's exposure to commoditised end-products along with the large size of its customers, which effectively reduces the company's bargaining power.
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 robust to withstand weaker market conditions than at present. The outlook also reflects our view that Södra will maintain its conservative capital structure and high levels of investment. We also expect market pulp prices, which have recovered strongly in 2024, to remain high. We believe construction activity has reached a cyclical low, and that recovery in demand for sawn wood products will support product prices.
We could raise the rating to reflect increased diversity through investments in new value-added products or long-term improvements in operating conditions, with EBITDA margins approaching 20% and a continued strong financial risk profile.
We could lower the rating to reflect long-term net debt/EBITDA above 1x, regulatory changes that have a negative effect on the business risk profile, or weakened credit metrics. We could also lower the rating in the event of unexpected long-term mill outages that negatively impact investment, costs, and volumes.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BBB+ | BBB |
| Outlook: | Stable | Stable |
| Short-term issuer credit rating: | N2 | N3 |
| Senior unsecured issue rating: | BBB+ | BBB |
Contacts:
Elisabeth Adebäck, analyst, +46700442775, elisabeth.adeback@nordiccreditrating.com
Gustav Nilsson, analyst, +46735420446, gustav.nilsson@nordiccreditrating.com
Sean Cotten, chief rating officer, +46735600337, sean.cotten@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.