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1. EXECUTIVE SUMMARY
Earnings estimates
We have revised up our 2008E-2010E estimates for the Latam Paper & Forest companies on
higher BEK and NBSK pulp prices over the next 5 years (steady-state prices unchanged). We
have also incorporated 4Q07A figures into our models, reflecting higher pulp & paper cash
costs, and DB’s revised macroeconomic assumptions, reflecting stronger Brazilian Real (2008
EOP BRL1.75 vs. BRL1.85 previously) and Chilean Peso (2008 EOP CLP549 vs CLP561).
Lastly, we have updated our models with recently disclosed information on expansion plans
for Aracruz, VCP, CMPC and COPEC. These revisions have positive medium-term (2008E-
2010E) impact on earnings. Longer-term impact is mixed: positive for Aracruz and COPEC,
negative for Suzano, VCP and CMPC, depending on respective cash cost trends.
We expect Aracruz to generate EPADR of US$6.30 in 2008E (+1% vs. previously) and
US$8.88 in 2009E (+14%), and EBITDA of US$1.1bn (+9%) and US$1.4bn (+19%),
respectively. For Suzano, we forecast EPS of BRL2.75 in 2008E (-25%) and BRL 4.98 in
2009E (+4%), as well as EBITDA of US$958m (-8%) and US$1.4bn (+10%). We estimate that
VCP will generate EPADR of US$1.55/ADR in 2008E (+5%) and US$3.13 in 2009E (+36%),
and EBITDA of US$401m (+11%) and US$884m (+31%).
DCF valuations
Aracruz. We re-iterate our Buy rating for Aracruz, one of our top picks. We are raising our PT
to US$88/ADR from US$85 to account for higher estimates driven by revised pulp prices. We
arrive at a NPV of US$95/ADR by discounting Aracruz’s US dollar cash flows (2008E-2017E)
using a WACC of 8.6% and nominal perpetuity growth of 3%. We attribute a 20% discount
to preferred shares vs. voting ones on the absence of tag along rights, resulting in US$88.
Our PT implies target P/E multiples of 14x in 2008E and 10x in 2009E, as well as EV/EBITDA
multiples of 9x and 7x, respectively. Our PT also implies a 18% potential return to investors.
Suzano. We re-iterate our Buy rating for Suzano, our other top pick. We are adjusting our PT
to BRL38/share from BRL40 on the impact of higher cash production costs in our longer term
forecasts. We arrive at net present value of US$23/share or BRL40 by discounting its cash
flows in US dollars (2008E-2017E) using a WACC of 8.7% and a nominal perpetuity growth
rate of 3%. We also attribute a 20% discount to the company’s preferred stocks vs voting,
arriving at BRL38/share. Our revised PT implies target P/E multiples of 13x 2008E and 8x
2009E, or EV/EBITDA multiples of 9x and 6x. Our PT also implies 33% total return potential.
VCP. We are reducing our PT for VCP to US$34/ADR from US$37 to reflect lower margins in
the long term, but we maintain our Buy. We arrive at net present value of US$37/ADR by
applying a WACC of 8.6% to the company’s US dollar free cash flows (2008E-2017E) and
using perpetual growth of 3%. We apply a 20% discount to the company’s preferred stock
on the absence of tag along rights. Our PT implies P/E multiples of 22x 2008E and 11x
2009E, and EV/EBITDA multiples of 19x and 9x. It also implies 8% total potential return.
CMPC. We reiterate our Hold rating for CMPC, based on a revised CLP19,000 price target.
We arrive at a net present value of CLP19,000 by discounting its Chilean GAAP FCFs in
Chilean Pesos (2008E-2017E) using an 8.2% WACC and a 4.5% perpetuity growth. Our PT
implies P/E multiples of 19x 2008E and 13x 2009E, and implies a 6% potential total return.
COPEC. We reiterate our Hold rating for COPEC, based on a revised CLP7,600 PT. We arrive
at an NPV of CLP7,600 by discounting COPEC’s Chilean GAAP FCFs in Chilean Pesos (2008E-
2017E) using an 8.1% WACC and a 4.5% perpetuity growth rate. Our PT for COPEC implies
target P/E multiples of 19x 2008E and 14x 2009E. It also implies a -1% potential total return.
Multiples valuation
Aracruz and Suzano trade at attractive 2008/2009 P/E and EV/EBITDA multiples. Comparing
Aracruz to its closest peer VCP and to the Latam average: Aracruz trades at P/Es of 12.2x in
2008 (-41% vs. VCP / -29% vs Latam) and 8.6x in 2009 (-15% / -26%), and EV/EBITDA of 8.4x
2008 (-34% / -17%) and 6.4x 2009 (-4% / -15%). We note that VCP’s EV/EBITDA has been
adjusted to add 12.4% of Aracruz’s Net Debt and EBITDA.
Table of Contents
1. EXECUTIVE SUMMARY ................................................................ 3
2. EARNINGS OUTLOOK & VALUATION....................................... 11
Latam earnings outlook............................................................................. 12
Valuation..................................................................................................... 14
Stock price performance ........................................................................... 21
Financial ratio analysis .............................................................................. 25
3. INDUSTRY OUTLOOK ................................................................. 27
Pulp prices revision.................................................................................... 28
Global demand/supply .............................................................................. 33
Supply shocks refresher ............................................................................ 42
4. LATAM COMPANIES REVIEW.................................................... 48
Latam Paper & Forest Trip ........................................................................ 49
Investment thesis - Aracruz ...................................................................... 62
Earnings outlook – Aracruz ....................................................................... 64
Investment thesis – Suzano ...................................................................... 72
Earnings outlook – Suzano........................................................................ 74
Investment thesis – VCP............................................................................ 80
Earnings outlook – VCP ............................................................................. 82
Investment thesis – CMPC ........................................................................ 87
Earnings outlook – CMPC.......................................................................... 89
Investment thesis – COPEC....................................................................... 95
Earnings outlook – COPEC ........................................................................ 97
APPENDIX A – European Paper Outlook ..................................... 104
Industry outlook ............................................................................ 105
Demand/Supply by product ......................................................... 111
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