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SCA – You Wood Not Believe It

March 22, 2024 – SCA’s AGM gives investors the rare opportunity to press management for more clarity on their gravity defying forestry assets.

  • SCA have significantly brought forward the timing of two FTAX surveys, the most recent in 2019.
  • SCA then acquires standing timber (m3fo) at significant premiums to this valuation and sells m3fo at significant discounts to this valuation.
    • This spread exists because a SEK/m3fo incorrectly assumes that all m3fo is valued the same. If we assume m3fo exhibits linear growth across its asset cycle (it is slightly parabolic), the growth yield over 100 years (1%) is vastly outpaced by any reasonable discount rate.
    • SCA is buying early cash flows, and therefore the NPV, through cash acquisitions (outflows) which are not reflected in the NPV.
  • By locking-in increased long-term simulations of growth and inventory, SCA are able to materially increase harvesting rates, despite various restrictions on the harvest yield of the assets.
  • SCA’s forestry surveys incorporate new simulated growth rates and harvest rates, both of which have increased ~40% and~25% respectively between surveys in 10 years. How this happens in the ultimate predictable longterm asset such as 100-year asset cycle forests evades us.
  • SCA has also failed to substantiate the use of unreasonably low discount rates used to value its biological assets while 317kha of forest sold to Billerud, has recently been written down specifically due to rising discount rates.

Viceroy dives into SCA’s ludicrous valuations, its acquisition strategy and cash flow timing, rampant overharvesting and comparison to peers. Investors do not have to believe Viceroy, but they do have to live with a yield diminishing asset.

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