KLABIN SA KLBN11 BZ S
November 19, 2016 - 10:19pm EST by
chatham123
2016 2017
Price: 16.11 EPS N/A N/A
Shares Out. (in M): 1,140 P/E N/A N/A
Market Cap (in $M): 5,432 P/FCF N/A 11x
Net Debt (in $M): 3,563 EBIT 1,480 1,568
TEV ($): 8,995 TEV/EBIT 20.5x 19x
Borrow Cost: General Collateral

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Description

Klabin (KLBN11 BZ) is a short. The name trades at 11.6x ev/2017 ebitda and 11.8x ev/2018 ebitda vs its historical average multiple of 10.7x. Consensus numbers for 2017 and 2018 are 22% and 30% too high.

 

Thesis: Chinese hardwood pulp prices are going to drop $50/ton over the next 6 months driven by the ramp of APPs Oki mill in south sumatra. As this happens, pulp prices for Klabin's newly constructed Puma mill output will fall, pressuring ebitda. Longer term, the company has said they want to expand production of liquid packaging board by constructing a new mill, however Fitch has said if they build the mill they'll downgrade the company. Klabin is leveraged 5.1x net debt/LTM ebitda. In fact, Fitch has said they could take negative actions against Klabin if their leverage remains above 3.5x in 2017 vs the company's guidance of 3.2x, which is too optimistic. I believe a downgrade is likely - with or without the construction of the new consumer board mill. If they do build the mill, it will help the diversify away from falling pulp prices, however the company admits the liquid packaging board market is oversupplied and another mill would weigh on global prices. I estimate 18% of global LPB demand is set to come online over the next 3 years assuming a Klabin LPB mill ramp. The company's EVA spread has been negative HSD/LDD and I expect it to remain so for the forseable future.

 

Risk/Reward

 

UpsideCase - Risk       Downside Case - Reward  
2017 Street EBITDA   3,352   Chtham 2017 EBITDA 2,616
Multiple   10.0 x   Multiple   9.0 x
EV   33,524   EV   23,540
Net Debt   12,050   Net Debt   12,050
Risk Price     18.83   Reward Price     10.08
% Upside 17%   % Downside -37%

 

How do we get paid?

1) ebitda misses/ street resets numbers lower, 

2) ramp of APP's oki mill pressures pulp prices

3) company delays ramp of new consumer board mill

4) Fitch downgrades the company's debt, sending borrowing costs higher and further pressuring their already negative EVA spread

5) company builds new consumer board mill, adding debt to structure, forcing downgrade, and sending LPB prices lower

 

 

 

 

What is the street missing? 

Street numbers are 50% too high in the company's forestry segment due to a spike in wood prices early in the year due to abnormally high rainfall/flooding - they assume largely flat prices. For those that don't, they are missing the fact that the company has had to repurpose their forestry segment to feed their new pulp mill, which is goign to result in lower external wood volumes going forward. 

Street also models flat pulp prices, while in reality pulp prices are going to be falling due to the ramp of APPs mill. Klabin's mix shift to fluff pulp will help offset some of the headwind, but not all of it - i am 15-20% below on pulp ebitda looking out the next few years. 

Street price targets of 20 BRL/unit assume a 10.5x multiple - in line with the company's historical multiple - despite 30% of the company's EBITDA now coming from pulp, and pulp comps (Fibria, Suzano) trading at 7x EBITDA. Weighting the company's new mix the street should be assuming a 9-9.5x multiple. I see 40% downside to Klabin's share price assuming a 9x multiple and 2.6bn BRL in 2017 EBITDA. This assumes a hardwood pulp price of 477, softwood price of 577 and a fluff price of 627, fluff production ramping to 75% by the end of 2017 and spot USDBRL. 

 

APPENDIX:

 

Global Pulp Supply-Demand                     
'000 tonnes                    
    2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020E  
Capacity                    
Total BHKP   30,280 31,115 32,680 34,305 36,383 39,826 41,923 43,250  
Total NBSK   25,860 26,025 26,130
27,300
27,865 28,520 28,730 28,630  
Total capacity   56,140 57,140 58,810 61,605 64,248
68,346
70,653 71,880  
% change   2% 2% 3% 5% 4% 6% 3% 2%  
                     
Consumption                    
North America   7,555 7,535 7,599 7,633 7,646 7,638 7,631 7,625  
% change   4.5% -0.3% 0.8% 0.4% 0.2% -0.1% -0.1% -0.1%  
Europe   17,285 17,525 17,593 17,701 17,795 17,973 18,000 18,023  
% change   1.3% 1.4% 0.4% 0.6% 0.5% 1.0% 0.2% 0.1%  
Latin America   3,150 3,310 3,418 3,520 3,626 3,722 3,820 3,897  
% change   1.8% 5.1% 3.3% 3.0% 3.0% 2.6% 2.6% 2.0%  
China   14,580 15,240 16,741 18,247 19,525 20,891 22,354 23,471  
% change   6.2% 4.5% 9.8% 9.0% 7.0% 7.0% 7.0% 5.0%  
Others   9,380 9,160 9,251 9,390 9,484 9,544 9,605 9,667  
% change   -1.2% -2.3% 1.0% 1.5% 1.0% 0.6% 0.6% 0.6%  
Total consumption   51,950 52,770 54,602 56,491 58,075 59,768 61,410 62,683  
% change   2.6% 1.6% 3.5% 3.5% 2.8% 2.9% 2.7% 2.1%  
                     
Global Pulp Utilization Rate   92.5% 92.4% 92.8%
91.7%
90.4%
87.5%
86.9% 87.2%  
Year to year change (bps)   20bps -18bps 49bps -114bps -131bps -294bps -53bps 29bps  
                     

 

Global Liquid Packaging Board Supply-Demand

Annual global demand growth: LSD

                       
    Mill  Tons ('000) Notes:            
  Stora Guangxi 450   building 450k ton machine in China      
  Billerud Frovi 140   building 400k ton machine; shutting down 260k ton machine  
  Klabin Mill #11 135   Total mill capacity 450k tons; they will ramp over time  
    Total 725                
    Market 4000                
    Addtiions as % of Mkt 18.1%                

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

1) ebitda misses/ street resets numbers lower, 

2) ramp of APP's oki mill pressures pulp prices

3) company delays ramp of new consumer board mill

4) Fitch downgrades the company's debt, sending borrowing costs higher and further pressuring their already negative EVA spread

5) company builds new consumer board mill, adding debt to structure, forcing downgrade, and sending LPB prices lower

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