AUGUST 10, 2021 8:00 AM

High pulp prices justify investment growth

buy

Klabin (BB + / - / BB +) posted strong 1Q21 results, although we note that the company's debt burden remains elevated due to investments in the PUMA II project. Net Debt to EBITDA rose 5x at the end of March from 4.7x at the end of 2020. Development of the project will continue to put pressure on the debt burden until at least the launch of the first kraftliner plant, which is scheduled for the second half of the summer. In our opinion, the game is worth the candle, so Klabin will already benefit from the increase in pulp prices. High spot prices for hardwood in China support the company's debt profile and keep leverage at a manageable level despite continued investment in the project.

YTM
3.5%

RISK
BB+ / - / BB+

DURATION
6.3

Klabin maintains a significant share of the local Brazilian market, which generates almost 55% of total revenues. The company has sufficient funds to finance the PUMA II project in full and maintains a significant balance of free funds to service obligations, which minimizes both credit risks. We would like to point out that the recent management decision to move its second PUMA II plant to a coated board production site, where it was previously planned to produce kraftliners, will result in additional capital expenditures. However, we expect the additional costs to have a minimal impact on the debt burden. At current pulp prices, Klabin can generate high free cash flow. Among the issuer's Eurobonds, we note an issue with maturity in April 2029 (USA35155AA77), which offers a dollar yield of 3.5% with a duration of 6.3 years.

Brazil's Klabin is the country's #1 paper producer, exporter, and recycler. Its activities span manufacturing paper, packaging, industrial sacks, as well as forestry. Klabin owns and leases a million plus acres of timberland and operates 18 plants. Core products are eucalyptus and small logs for sawmill industries, packaging paper (Kraftliner, Klabin Boards), corrugated boxes, and multi-wall sacks. Klabin sells to markets from construction materials to food and beverage, chemicals, and agribusiness. Unilever is among its largest customers. It is held by industrial family group Klabin Irmãos & Cia.