Stock Market Information

Recommendation Summary

We assign an Overweight recommendation to CMPC with a 2018E TP of $2,550 /share, equal to an expected total return (including dividends) of 13.4% for the next 12M. We have revised our projection for pulp prices upwards amid better prospects in China and developed economies, compounded by the reincorporation of Guaiba II and ensuing normalization for pulp cash-cost (fewer days of downtime).

Investment Thesis

• Demand growth could match new short fiber supply. In 2017, demand for short fiber increased ~ 1.450 MT, while additions to net capacity grew -230 MT due to unexpected stoppages and vertical integration. The outlook for 2018 contemplates a correction in prices due to greater supply, however, we estimate this correction could be less than initially projected. Industry leader Fibria continues to raise prices (January and February), although paper and tissue producers in China have offered resistance to the latest increases, thus pulp prices would be close to their maximum levels and we expect the correction to begin in 2Q18. During 2018, we have incorporated a gradual US$100 USD per ton correction. We estimate supply will expand 2.930MT (mainly Horizonte II and OKI). Demand in Europe has remained stable and growth is mainly explained by China. New capacities in paper and tissue have positively driven demand from this country, compounded by cotton prices (3 year maximums) and restrictions on the use of recycled papers favoring the substitution of market pulp. We estimate favorable demand perspectives in China would continue in 2018 and an increased demand for short fiber (2.215 MT thanks to new paper and tissue capacities in China primarily) could absorb a large portion of capacity from Horizonte II and OKI projects, resulting in a lower than expected correction by the market. Moving forward in 2019, there are no other projects of a similar scale that come into operation, thus expectations remain favorable until 2021. In this line, our model incorporates average realized prices for short fiber of US$680/MT in 2018 and US$ 640/MT in 2019, and a ~US$60 softwood-hardwood spread in realized prices.
• Growth in pulp business flows would mainly come from higher average prices in 2018 vs. 2017, driven by greater volumes and normalized cash-cost due to fewer days of downtime (Figure 1). During 4Q17 and part of 2018 inventories and sales will recover thanks to fewer days of downtime in plants. In the long term, we estimate 2.786 MT annual volumes of short fiber and 646 MT of long fiber, consistent with no overall variation in inventory (balance in inventory is reached, taking into account that the tissue segment must be supplied by pulp) and nominal production capacities (incorporating annual maintenance days for each plant). Thus, recovery in results would be evident this year. We estimate 2018E and 2019E Ebitda to reach US$1.570mn and US$1.448mn, respectively.

• The investment plan included in our valuation contemplates US$500mn for 2018 onwards, of which, the administration has stated main projects would focus on new Tissue plants in Brazil and Mexico. We have incorporated a new plant every 2 years (gradually) over the long term, adding capacity in countries with a plant load factor approaching 100% due to increased demand from population growth and increasing per capita consumption (Figure 2).

• Improvements in working capital and increased Ebitda will enable a favorable deleveraging of the balance sheet. We estimate the ratio will be situated at the low end of the financial policy for the greater part of the year (2.5x – 3.5x) and as far as 2.1x providing ample room to finance new projects (Figure 3).

• Trailing EV/Ebitda multiple is trading at 12.2x, a relatively high level, however, we estimate a 2018 EV/Ebitda forward of 8.0x due to a strong 2018E Ebitda, providing space for share price increases in pursuit of our target price. Additionally, news of a possible consolidation of companies in Brazil and ensuing decreased competition in prices, along with less attractive levels of return in USD (recent CLP appreciation) has opened a gap in multiples when compared to its peers (Figure 4).

• Given the importance of short fiber pulp prices in CMPC’s valuation, we have incorporated target price sensitivities incorporating different levels for the underlying asset (see box below) and we have set a US$60 spread in long term pulp (Chinese price) as a working assumption in the long term.

• Overall, we maintain an Overweight recommendation on CMPC with a TP of $2,550 /share which implies an expected total return of 13.4%.

Risks

(+,-) Decreases/increases in Pulp prices greater than those incorporated in our valuation model, especially in short-fiber given the high dependence of CMPC on its price.

(+,-) Corporate decisions and/or changes to the temporality of supply expansions could alter our baseline scenario on reference prices in main lines of business.

(-) Changes to the investment plan and/or project completion deadlines, with regard to previously established timeframes.

(+,-) Appreciation/Depreciation of local currencies (BRL and CLP)

(-) Pulp mill maintenance downtimes beyond expectations would impact our forecasts.

(+) Change in geographical mix: Greater sales to Asia in pursuit of better short-term prices would boost 2018 results.

Fernando Errázuriz

[email protected]

Operational Estimates (USD mn)

Company Description

CMPC operates in the P&P industry through the production of Pulp, Paper, Tissue and Forestry & Wood products.