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A Suzano (SUZB3) announced yesterday (3) that its cellulose production volume in 2024 (excluding Cerrado) will be 4% below its nominal production capacity.
According to the BTG Pactualthe measure reinforces the commitment of the company, leader in the segment, to discipline the sector and optimize its overall ROIC (return on invested capital), with Suzano opting to reduce uneconomic capacity.
For the bank, which recommends purchase and a target price of R$81 (potential for an increase of 47.68%), the share is even cheaper than before, trading close to historical minimum levels of multiples of 5x EV/Ebitda (firm value over operating income) 2025 (vs. ~7x fair).
“Although the short-term outlook for pulp prices is negative and a correction is underway, we note that the consensus already takes this into account, with shares pricing on a pulp curve close to US$520/t. Even at US$550/t of pulp, we see Suzano delivering an FCFE yield of 8-10%, which is quite impressive”, say Leonardo Correa and Marcelo Arazi
In June, when the company was still investigating a possible acquisition of International Paper, the bank even highlighted that the company was the most discounted pulp stock in the world.
SUZB3 goes back to basics
For BTG, the investment case should gradually return to its fundamentals after the attempt to acquire high-value assets was poorly received by the market.
“While we expect the reclassification to be gradual and believe there will be some long-term damage to its multiple due to capital allocation concerns, the R$20 billion reduction in shares is clearly excessive. We now expect the case to be driven mainly by the acceleration of the project (Cerrado, not priced), higher exchange rates and deleveraging prospects.”
Cellulose prices
According to the bank, the production cut should result in a minimal financial impact, as production is currently operating at a very low Ebitda/t.
“With cellulose prices hardwood (HW) in China trading close to US$570/t, we argue that several higher cost marginal producers are likely already underwater (negative EBITDA).”
Now, they point out, Suzano, the sector leader and lowest cost producer by far, is signaling that, at these price levels, the returns on certain assets are clearly uneconomical (ROIC well below the WACC).
The institution sees the cut as positive overall, representing around 1% of the global cellulose market.
According to analysts, the collapse in prices, which went from US$700/t to US$570/t, went too far, and pressure is increasing for the sector to rationalize capacity.
“In this pressured market environment, we expect additional capacity cuts to be announced in the coming months to rebalance the market.”