Pulp Price Recovery And Puma II Ramp-Up Will Support Steady Long-Term Earnings

Catalysts

About Klabin

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

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

• Although Puma II ramp-up, higher pulp and paper volumes and a modernized asset base support incremental operating leverage, the current trough in short fiber and kraftliner prices and persistent Chinese overcapacity in board may cap pricing power and keep revenue growth close to cost inflation, limiting EBITDA expansion and earnings upside.
• Despite the shift from a heavy CapEx cycle to a free cash flow generation phase and structurally lower maintenance CapEx, elevated absolute net debt, a long deleveraging runway and the possibility of continued low pulp prices could divert cash from growth initiatives to balance sheet repair, constraining net income and dividend growth.
• While Klabin benefits from long term demand tied to food, beverages and e commerce packaging, muted consumption in key export markets and substitution pressure from lighter packaging designs could slow volume growth in corrugated boxes and coated board, compressing revenue growth and potentially pressuring margins if utilization falls.
• Although the Caete forestry platform and high productivity pine and eucalyptus areas strengthen cost competitiveness over the cycle, rising climate and weather volatility in Brazil, changing harvest patterns and logistics costs may erode part of the anticipated cash cost gains, limiting improvements in unit cash costs and ultimately constraining EBITDA margin expansion.
• While portfolio diversification across pulp, paper, fluff and packaging and the ability to switch Machine 28 between kraftliner and coated board add strategic flexibility, ongoing global capacity additions in pulp and sustained low cost Chinese exports in board may structurally compress price spreads, tempering long term revenue growth and keeping returns on invested capital and earnings growth only modestly above current levels.

Assumptions

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

• The bearish analysts are assuming Klabin's revenue will grow by 2.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.3% today to 8.5% in 3 years time.
• The bearish analysts expect earnings to reach R$1.9 billion (and earnings per share of R$1.54) by about December 2028, up from R$1.7 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as R$5.0 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 21.3x on those 2028 earnings, up from 13.0x today. This future PE is greater than the current PE for the BR Packaging industry at 8.9x.
• The bearish 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 21.44%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A cyclical recovery in short fiber and kraftliner prices from what management describes as historically depressed levels could unlock around BRL 1 billion in additional annualized EBITDA, materially lifting earnings and supporting a higher share price through improved revenue and net margins.
• The successful ramp-up of Puma II, the modernization of core mills such as Monte Alegre and Ortigueira, and structurally lower cash costs per ton could position Klabin for sustained volume growth above GDP and sector benchmarks. This could drive earnings and valuation multiples higher than implied by a flat share price outlook.
• Ongoing deleveraging supported by strong free cash flow generation, robust liquidity, and monetization of surplus land and forestry partnerships could reduce financial risk and interest expenses, increasing equity value through higher net income and potentially more generous shareholder returns.
• The company’s ability to grow packaging and corrugated box volumes ahead of the market, maintain pricing above inflation, and pivot Machine 28 between kraftliner and coated board to prioritize profitability could result in faster revenue expansion and more resilient margins than assumed in a stagnant share price scenario.
• Strategic exposure to long-term demand in food, beverages, pharmaceuticals, and e-commerce, combined with one of the most productive forestry platforms for pine and eucalyptus globally, may support structurally higher utilization and cost advantages. This could lift long-term revenue growth and earnings beyond what a flat valuation would suggest.

Valuation

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

• The assumed bearish price target for Klabin is R$18.71, which represents up to two standard deviations below the consensus price target of R$24.41. 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 more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$30.69, and the most bearish reporting a price target of just R$18.71.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be R$22.4 billion, earnings will come to R$1.9 billion, and it would be trading on a PE ratio of 21.3x, assuming you use a discount rate of 21.4%.
  
• Given the current share price of R$18.17, the analyst price target of R$18.71 is 2.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.