Global Pulp Overcapacity And Energy Decline Will Depress Margins

Key Takeaways

• Declining pulp prices and fossil fuel demand, combined with regulatory pressures, threaten long-term margins and earnings across core forestry and energy divisions.
  
• High leverage, project-related capital needs, and exposure to regional volatility heighten risks of earnings instability and margin compression.
  
• Strategic investments in energy and renewables, geographic expansion, and digital transformation position the company for resilient growth, operational efficiency, and improved margins amid industry shifts.

Catalysts

Operates in the natural resources and energy sectors in Chile and internationally.

• Structural overcapacity in the global pulp and paper industry combined with persistent regulatory pressures is likely to result in sustained downward pressure on pulp prices and compress margins for Empresas Copec's forestry subsidiaries over the long term, directly challenging revenue growth and profitability.
  
• As the global energy transition accelerates and governments continue to phase in stricter carbon taxes and mandated emissions reductions, Empresas Copec's core energy divisions face a structural decline in fossil fuel demand and mounting compliance costs, putting long-term revenue streams and net margins at risk.
  
• The ongoing shift toward electrification in transportation-including electric vehicles, charging infrastructure, and alternative mobility solutions-will erode conventional fuel sales and reduce the relevance of Empresas Copec's traditional service station network, undermining future earnings and same-store sales growth.
  
• High capital expenditures related to large-scale projects like Sucuriú increase leverage at a time of elevated volatility in both pulp and traditional energy markets, raising the likelihood of lower return on invested capital and greater earnings sensitivity to adverse commodity cycles.
  
• Reliance on core Latin American markets for a significant portion of both forestry and energy revenues exposes Empresas Copec to regional economic and political instability, increasing the probability of currency-driven margin compression and volatile consolidated earnings in future reporting periods.

Empresas Copec Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Empresas Copec compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Empresas Copec's revenue will decrease by 1.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 3.7% today to 1.5% in 3 years time.
• The bearish analysts expect earnings to reach $389.6 million (and earnings per share of $0.32) by about September 2028, down from $1.1 billion today. The analysts are largely in agreement about this estimate.
• 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 30.8x on those 2028 earnings, up from 9.3x today. This future PE is greater than the current PE for the CL Specialty Retail industry at 11.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.75%, as per the Simply Wall St company report.

Empresas Copec Future Earnings Per Share Growth

Risks

• The company's strong growth in energy segment volumes and broad-based geographic expansion, particularly in Latin America and with the consolidation of new European assets like Gasib, underscores Empresas Copec's ability to capture long-term growth trends in global energy demand, which could help support sustained revenue growth.
  
• Major investments in renewable energy infrastructure, including projects like battery energy storage linked to the Granja Solar asset and the expansion of electroterminals for city buses, position Copec to benefit from the secular shift toward decarbonization, potentially improving long-term earnings quality and supporting net margins as traditional fuel markets decline.
  
• The Sucuriú project in the Forestry division demonstrates significant forward investment, with regulatory approvals, supply chain partnerships, and substantial progress in securing land and initial infrastructure, suggesting the potential for higher production capacity and efficiencies that may bolster operating margins and capital returns once operational.
  
• The company maintains robust cash holdings of $2.7 billion and healthy debt metrics, with net debt to EBITDA within the desired range even during a high CapEx cycle, suggesting Empresas Copec is capable of weathering economic headwinds or commodity cycles, helping to stabilize earnings and protect net income.
  
• Ongoing efforts in ESG, strategic partnerships, and digital transformation-such as expanding omnichannel retail experiences and advancing supply chain efficiencies-reflect an ability to adapt to changing industry and consumer dynamics, which could improve both revenue resilience and margins over the long run.

Valuation

• The assumed bearish price target for Empresas Copec is CLP5950.41, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Empresas Copec'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 CLP10121.94, and the most bearish reporting a price target of just CLP5950.41.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $26.7 billion, earnings will come to $389.6 million, and it would be trading on a PE ratio of 30.8x, assuming you use a discount rate of 14.8%.
• Given the current share price of CLP7325.0, the bearish analyst price target of CLP5950.41 is 23.1% lower.
• 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.