The Long and Short
Challenging fundamentals for Suzano
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Pulp producer Suzano’s unsuccessful attempt to implement a $30 per ton price hike in July was just the latest indicator of the demand and pricing pressure in the pulp market. The company’s capex strategy for Cerrado, its new pulp plant, which involves about R$9.8 billion of remaining investment before its anticipated June 2024 start date, has also added to concerns. While the new line is expected to offer cost benefits to the consolidated credit profile going forward, it might result in an overhang on global commodity price performance due to increased capacity.
In the second quarter of 2023, pulp prices continue to face challenges, with approximately 20% of global production operating below break-even costs. This situation is likely to lead to further production declines in the coming period, as producers took around 1 million tons of production offline in the second quarter.
In terms of financial performance, Suzano reported a 36% quarter-on-quarter decline and a 38% year-on-year decline in EBITDA for the second quarter. The drop was broadly in line with expectations, given the decline in realized pulp prices. However, solid sales volumes and slightly lower pulp cash costs partially offset the impact of lower prices. Pulp sales volumes reached 2.5 million tons in the quarter, showing a 2% increase compared to the previous quarter but a 6% decrease year-on-year.
Despite Suzano’s solid year-on-year results in its Paper Division, the division faced weaker figures in the second quarter, with adjusted EBITDA falling 11% mainly due to lower realized prices.
Suzano’s gross debt increased sequentially due to new financings completed during the period. This includes a new $600 million credit line from the IFC and a R$500 million transaction with BNDES. Additionally, advances on export exchange contracts amounted to about $135 million, and the issuance of debentures totaled R$1 billion. These were offset by the roughly 5% appreciation of the Brazilian real against the US dollar and some amortizations during the period. However, the capex-driven cash burn resulted in a $400 million increase in net debt, leading to a rise in net debt-to-EBITDA ratio from 1.9x to 2.2x at the end of the first quarter. The Cerrado investments and revenue headwinds should put net leverage to trend upwards towards 3.0x by the end of the year.
Comparing Suzano’s 2031 bonds with those of Klabin offers a geographic comparable. There is currently a difference of around 40 bp, with Suzano tighter. Historically, a differential below 50 bp suggested value in the larger, better-rated Suzano. Despite the challenges in borrowing Klabin bonds, there looks like a mispricing opportunity, considering Suzano’s scale and better rating.
Suzano’s performance is worth comparing to Celara, which serves as a primary pulp comparable. The differential between the two has moved from flat to Celara 95 bp wider year-to-date before retreating. The sector has historically seen a much tighter spread between Suzano and Celara, averaging around a 43 bp difference LTM, influenced by export profiles, operational scale, and investment-grade ratings. Currently, Suzano is trading around this average difference, indicating limited relative value. However, as pulp prices stabilize, Suzano’s performance should improve.
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