Ramp-Up Of New Mills And Forestry Assets Will Drive Strong Long-Term Upside

Catalysts

About Klabin

Klabin is a Brazilian producer of pulp, paper and packaging solutions with a growing, integrated forestry platform.

What are the underlying business or industry changes driving this perspective?

• Ramp up of Puma II, Monte Alegre and Ortigueira, all state-of-the-art mills, is shifting Klabin from a long investment phase into a harvest phase that should support structurally higher EBITDA and faster earnings growth as utilization and mix improve.
• Disciplined CapEx and strong free cash flow generation, combined with BRL 1.8 billion net debt reduction in a single quarter and long average debt maturity, set the stage for accelerated deleveraging, lower financial expenses and expanding net margins.
• Leadership in corrugated boxes, with volumes growing above GDP and industry indices and underpinned by multi-year food and e-commerce demand, supports pricing power and steady revenue compounding even through commodity downcycles.
• Forestry advantages from the Caete Project and highly productive pine and eucalyptus assets in Brazil, together with shorter average distances and TIMO partnerships, are expected to structurally lower wood and cash costs, lifting EBITDA margins over the medium term.
• Flexible product mix between kraftliner, coated board and other papers, plus exposure to niche, premium virgin fiber grades that are becoming scarcer globally, positions Klabin to capture higher spreads and premium pricing, supporting revenue growth and margin expansion as demand tightens.

Assumptions

This narrative explores a more optimistic perspective on Klabin compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Klabin's revenue will grow by 7.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 8.3% today to 19.5% in 3 years time.
• The bullish analysts expect earnings to reach R$5.0 billion (and earnings per share of R$3.4) by about December 2028, up from R$1.7 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as R$2.5 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 13.5x on those 2028 earnings, up from 12.8x today. This future PE is greater than the current PE for the BR Packaging industry at 9.0x.
• The bullish analysts expect the number of shares outstanding to decline by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 21.46%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A prolonged global downturn in pulp and kraftliner prices, which are already at or below the historical worst levels even after inflation adjustment, could persist for longer than expected and limit the recovery in Klabin's commodity segments. This would constrain revenue growth and put sustained pressure on EBITDA and net margins over the long term.
• Structural overcapacity in coated board, particularly from low cost Chinese exporters that already force Klabin to avoid certain markets and product mixes, may continue or worsen. This could cap pricing power and volumes in higher value grades and reduce the upside to revenue and earnings that the integrated Puma II platform is expected to provide.
• Climate and weather related disruptions to highly concentrated, forestry based operations in Brazil, which management already notes as a recurring challenge, could raise wood and logistics costs over time and periodically disrupt production. This could erode the structural cash cost advantage that underpins current expectations for improving EBITDA margins and stable free cash flow generation.
• If domestic and export demand for corrugated boxes and packaging tied to food, e commerce and industrial activity fails to grow as anticipated, or shifts to alternative materials, Klabin's largest revenue segment may not sustain above GDP growth and inflation beating price increases. This could lead to slower revenue compounding and weaker protection of group level margins through commodity downcycles.
• Continued or renewed weakness in key end markets such as beer, milk, frozen foods and pharmaceuticals, combined with the need to periodically idle recycled paper machines and pivot between coated board, white top liner and kraftliner, could prevent Klabin from fully utilizing new capacity and achieving its targeted one third pulp, one third paper and one third packaging balance. This would limit operating leverage and could keep earnings and net margins below bullish expectations.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Klabin is R$31.0, which represents up to two standard deviations above the consensus price target of R$24.59. This valuation is based on what can be assumed as the expectations of Klabin's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$31.0, and the most bearish reporting a price target of just R$19.4.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be R$25.6 billion, earnings will come to R$5.0 billion, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 21.5%.
  
• Given the current share price of R$18.1, the analyst price target of R$31.0 is 41.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.