Nordic Wood

It has been over three months since the article about Nordic forest companies here on Vontobel's blog. Over the past three months, Holmen and Metsä Board have risen by more than 20% and SCA by 17%, while Rottneros has fallen by 15% and Billerud by 12%. The theme of the previous guest blog was how forest stocks often overreact and extrapolate occasional events, not least strong or weak quarterly reports, as if they were an important part of a larger trend.

I then said that forest companies are likely to form a relatively stable part of a growing economy, in the form of packaging and building materials, among other things, and that the positive trend for the sector should therefore continue over time. I noted that several of the Nordic shares seemed reasonably priced based on traditional key figures such as profit and sales multiples, or direct returns, but that I still thought there were better investment options. Specifically, I wrote that there was the potential to shine SCA which I thought would fall more than the index if we got a weak period for the stock exchange. The construction industry, Brexit, weaker growth in China and growing trade war were behind the analysis. I got it completely wrong and SCA became one of the big winners in the last three months.

I believe that this is a continuing over-reaction and still sees SCA as one of the most expensive companies in the sector and with major inherent risks. Of course, you do not have to shine SCA, but I think you can with good conscience opt out of the share from your portfolio.

If we instead look at the smallest and most volatile company in the sector, Rottneros, it also fell sharply after the article in May. Rottneros’ share price had almost doubled from 7,65 to 14,60 between December 2018 and May 2019, then fell 36% to bottom at 9,40 on September 10. It is a prime example of the sector's overreactions, which just-read and fast-footed individuals are more likely to benefit from than financial journalists and professional analysts with other agendas and incentive structures. Maybe it's time for Rottneros to pull up again, for example driven by a new strong period for the dollar.

Exactly one year before the last Nordic forest article in May, timber prices peaked at almost 65.000. And at the time of the previous blog, they had almost crashed to under 29.000. Now the timber index is at 37.000, which is well below the top and quite close to the local bottom. However, from a slightly longer perspective of 10-20 years, these levels also look unusually high.

The question you as an investor should ask is what prices and prices have overreacted this time and should look back at their average values or previous bottoms and peaks. Personally, I have a negative bias, but at the same time it does tickle a bit to think about the effects for Rottneros of both stronger dollars and timber prices, driven by new stimulus from the authorities (due to high oil prices following the attack on Saudi Arabia and weaker macro data worldwide). The timber terms do not have great liquidity, but as a private individual it may still work if you want to avoid the complexity of an entire forest group.