Hardwood Pulp Demand And Packaging Expansion Will Drive Powerful Long Term Upside Potential

Catalysts

About Suzano

Suzano is a global producer of pulp, paper and packaging solutions with an expanding presence in higher value-added segments.

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

• Sustained structural demand for hardwood pulp as Chinese integrated producers increasingly substitute away from softwood and recycled fiber, supporting higher realized prices and revenue growth as global cash costs rise above current market levels and loss-making capacity exits.
• Accelerating cost leadership through ongoing cash cost reductions below BRL 800 per ton, improved wood quality, logistics efficiencies and the Eldorado wood deal, which together expand EBITDA margins and support faster deleveraging even in low price environments.
• Scaling of Paper and Packaging, including Pine Bluff’s turnaround and growth in foodservice and SBS grades, positions Suzano to capture resilient consumption trends in packaging and tissue, lifting consolidated revenue diversification and dampening earnings volatility.
• Upcoming price hikes in China and other regions, combined with tightening wood chip markets and higher local production costs in Asia, create a favorable backdrop for Suzano to monetize its ultra-competitive Brazilian asset base through rising pulp prices and expanding EBITDA.
• Recent and ongoing growth investments, such as the new tissue mill in Aracruz, fluff capacity, sustainability upgrades at Limeira and the JV with Kimberly-Clark, are set to unlock higher value product mix, improving net margins and supporting a stronger earnings trajectory over the medium term.

Assumptions

This narrative explores a more optimistic perspective on Suzano 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 Suzano's revenue will grow by 17.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 12.8% today to 10.8% in 3 years time.
• The bullish analysts expect earnings to reach R$9.0 billion (and earnings per share of R$9.5) by about December 2028, up from R$6.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as R$5.9 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 25.5x on those 2028 earnings, up from 9.2x today. This future PE is greater than the current PE for the BR Forestry industry at 9.2x.
• The bullish analysts expect the number of shares outstanding to decline by 0.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 26.73%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Sustained structural decline in print and write demand in mature markets, coupled with ongoing contractions in coated paper in Brazil beyond the election driven 2024 spike, could cap volume growth for Suzano’s higher value Paper and Packaging segment and limit revenue diversification. This could weigh on consolidated revenue growth and constrain EBITDA expansion over the long term.
• Persistently challenging pulp pricing cycles, with hardwood and softwood prices recovering only gradually and remaining below the cash cost of a significant portion of global producers, may prevent Suzano from realizing the pulp price increases embedded in bullish expectations. This could pressure net margins and limit the forecast uplift in earnings despite its low cash cost position.
• Rising wood chip and local wood costs in China driven by structural factors such as tighter recycled fiber regulations, new integrated capacity ramp ups and climate related disruptions like regional floods could reset global marginal cost curves at higher levels. This could also compress the spread between hardwood and softwood, reducing the incentive for fiber substitution toward Suzano’s hardwood pulp and dampening long term revenue and margin upside from Chinese demand.
• Execution and integration risks in recent and planned growth initiatives, including the turnaround and scale up of Suzano Packaging in the U.S., the new tissue mill in Aracruz and the complex Kimberly Clark joint venture, may delay or dilute expected efficiency gains and synergies. This could increase operating complexity and CapEx needs and thereby limit improvements in EBITDA margins and slow deleveraging, which would undermine the assumed trajectory for earnings growth.
• Elevated leverage at 3.3 times in dollar terms combined with a large ongoing CapEx program and exposure to FX movements may leave Suzano vulnerable to prolonged low price cycles or slower than expected demand recovery in key markets. This could potentially force cutbacks in growth investments or value accretive projects and constrain future revenue expansion and earnings growth if macro or industry conditions remain unfavorable.

Valuation

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

• The assumed bullish price target for Suzano is R$92.0, which represents up to two standard deviations above the consensus price target of R$71.99. This valuation is based on what can be assumed as the expectations of Suzano'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$92.0, and the most bearish reporting a price target of just R$58.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be R$83.7 billion, earnings will come to R$9.0 billion, and it would be trading on a PE ratio of 25.5x, assuming you use a discount rate of 26.7%.
  
• Given the current share price of R$48.71, the analyst price target of R$92.0 is 47.1% 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.