Publications

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.

March 21, 2024 - Citi analysts have triple counted biological asset valuations in their financial model. A correction brings the price target from SEK 156 to SEK 95. On 15 March 2024 we wrote to Citi analyst, Ephrem Ravi, to inform him of a material calculation error in his SCA financial model, which we have sighted. Viceroy’s team have subsequently tried to reach out to Citi and Mr. Ravi on numerous occasions without response in order to not have to air this dirty laundry. A correction brings the price target from SEK 156 to SEK 95.

February 15, 2024 - On February 7, 2024, SCA responded to our report with data mined statistics which serve to satisfy management’s valuation and harvesting delusions. This response can be found here: https://www.sca.com/en/media/news/2024/clarification-regarding-questions-relating-to-the-valuation-of-forest-assets-harvesting-forest-damage-and-accounting-related-matters/ As usual: the majority of the sell side lapped up this response without taking a moment to verify any of managements claims. We will once again do our “high-school homework” for all of the analysts who haven’t done it themselves. SCA ‘s contention that their 2 million hectares of productive forest land are equivalent to private individual owned forest land is absurd and the company makes no attempt to substantiate this delusion. SCA’s lackluster rebuttal is a tacit admission that the value of its forest assets is materially overstated. Ludvig & Co’s recently presented numbers show that SCA’s forest asset value is overstated by SEK24b. In what is either a staggering coincidence or a colossal management oversight, this discrepancy is almost entirely eliminated when adding SCA’s ~600,000ha of unproductive forest land to the same calculation. SCA provides unaudited data for a timeframe that does not align with its valuation methodologies, counties that do not align fully with its forest holdings, and in units that do not correspond with those stated in its annual reports. More to come.

February 1, 2024 – Viceroy Research will debate Christian Kopfer of Handelsbanken this Friday, February 2, 2024, on DITV. This serves as an opportunity to address aspects of our analysis that were disregarded in his last appearance. Viceroy offers this summary of our work. Breaking out the valuation methodology of Viceroy, SCA, sell-side analysts, and requisite inputs for full transparency and so viewers can follow along. Viceroy has made a business of repudiating the work of complacent analysts for more than eight years. When it comes to scrutinizing our analysis and challenging our conclusions we welcome facts - rather than unfounded appeals to management & audit authority, or logical fallacies, as has been the case to date. Viceroy can condense our economic argument to 4 main points, and these do not consider the impact of biological risk facing SCA’s forest assets. The yield of forestry assets is ~1%. SCA attributes a SEK 101b valuation to its forestry assets which, on a standalone basis, generates ‘cash EBITDA’ – as a proxy for FCF – of SEK 1.3b. Log price inflation is flat. Historical sawlog prices in Northern Sweden have grown 1.18%pa since 1995 which includes two outliers of more than 10% [YoY] in 2022 and 2023 The underlying value of the forest assets is outpaced. SCA’s Forest assets present a ROIC of 3.6%-3.8%5 (ex. sawlog & pulpwood inflation) against a sell-side WACC of 6.1% (on the low end, Handelsbanken). The harvesting yields do not add up

We have previously explained how SCA’s forest asset valuation model is entirely inappropriate and its unexplained premium in m3fo to competitors. This results in a valuation that is completely dislocated from future cash flows, the only real purpose of the 2m hectares of productive forest land on SCA’s balance sheet. SCA appears to account for over 40% of transactions by area transacted according to our calculations. This is yet another problem with the market valuation methodology: thin trading volumes dominated by players whose uses for the asset (forestry) is at odds with most buyers (leisure).

January 25, 2024 – Viceroy are short Svenska Cellulosa AB (STO:SCA-B)(“SCA”). SCA has massively inflated its forest assets on paper. Its valuation methodology has relied on short-term price fluctuations, interest rate fluctuations, and mark-to-market assumptions for numerous unrealistic inputs to massively inflate SCA’s forestry assets. In this report we highlight the following concerns" We believe SCA has vastly overstated the volume of its forest assets, which is the primary biological volume input against mark-to-market sales data. SCA’s DCF valuation is extremely sensitive to its discount rate because its discount rate is extremely low at 2.65%, even in 2022 when the Swedish policy rate ended at 2.5%. SCA’s mark-to-market approach uses market value transaction data from sales of, mostly, non-productive land (i.e. hobby, environmentalism, gaming). SCA appears to have aggressively overharvested inventory and has brought forward expected forestry volume yields, possibly to justify aggressive valuations on mega long-term asset cycles. SCA has been reprimanded for overharvesting and early-harvesting violations on various occasions. SCA and other Swedish operators face several environmental threats with new research showing widespread damage to younger forests throughout the country. Viceroy’s investigation is ongoing, and we anticipate producing further SCA reports, as well as a review of SCA’s 2023 results, in the near term.