Klabin (OTCPK:KLBAY) has defied bearish calls for a cyclical downturn so far, most recently delivering record quarterly EBITDA numbers in the third quarter on strong volumes and favorable price adjustments. While the company hasn’t been immune to inflationary cost pressures, so has the ongoing core price Strength and appropriate seasonality of paper products should support the same strength in the fourth quarter. Heading into 2023, the main debate still revolves around pulp/kraft paper prices and where they eventually settle in what could be an oversupply situation. Naming the top of the cycle is beyond anyone’s abilities, but Klabin’s relative pricing strength in paper and packaging, plus the potential benefits from ramping up new paper machinery, should support earnings during a downturn. net, the arrow is masked at a 6x discounted valuation of debt (EV/EBITDA)along with an attractive yield of up to 7%.
Stronger for longer demanding environments
Even in the face of headwinds from macroeconomic conditions globally and the energy crisis in Europe, demand for Klabin’s products has remained strong. Tight supply conditions also helped – pulp prices, for example, have been resilient at high levels due to a persistent supply-demand imbalance. At some point, the cycle will inevitably shift, but I suspect the downhill cycle is farther than many would expect. According to Klabin’s management, the global pulp market will see nearly 1.2 million tons of additional volume online next year; However, constant disruptions in supply meant that most of the new capacity could be accommodated anyway.
Skeptics may point to signs of moderation in softwood pulp prices, with the softwood/hardwood premium declining recently. Most of the convergence is due to larger hardwood door supply issues, though, rather than easing supply/demand conditions in softwoods. Bringing supply back online will take time, and new capacity is set to enter the market only in 2023; Thus, prices can remain at high levels in the coming year as well. Even if supply-side conditions ease along with supportive logistical issues in the medium to long term, the positive impact of fiber-to-fiber and fossil-to-fiber substitution initiatives should provide price support.
Quarterly results defy extreme cycle fears
Klabin’s EBITDA growth of +21% qoq beat expectations for better pulp prices (average realized prices increased ~9% qoq). Paper EBITDA growth was even stronger at 31% qoq, as improved prices (+5% qoq) and volumes (+3% qoq) helped lower operating costs (-4% qoq). With most of the company’s products focused on the consumer business, which has shown greater resilience, its packaging products should continue to see strong demand in the coming quarters. Beyond the near term, ramping up of PM27 (Kraft Liner Machine) and start-up of PM28 (Coated Sheet Grade Production Line) in 2023 should support volume growth for the coming years.
The main concern is continued inflationary pressure on pulp costs – so far, Klabin has seen cash costs in its pulp business increase by approximately 11% qoq due to higher fuel and chemical prices (primarily related to caustic soda). In addition, the company is also exposed to higher prices for third party woods to supply the Puma II prime cycle (i.e. PM27/28). On the flip side, Klabin has proven to be able to pass cost inflation through sustained price increases. Furthermore, the one-off impact of chemicals and fuels on pulp costs this quarter should normalize over time, providing a negative boost to margins.
A healthy balance sheet to support the dividend
After strong quarterly results this year, Klabin’s decision to raise capital came back to R$502 million in dividends and interest on capital. [IOC] It will be well received by investors. Including the most recent dividend, this brings the total return to shareholders to R$1.6 billion, which means a healthy return of nearly 7%. Given that the dividend stands at a modest 15%-25% of adjusted EBITDA, it’s likely that this yield will continue through cycles as well.
Finally, the balance sheet is well-capitalized — while Klabin was negative last quarter, resulting in net debt up slightly compared to the prior quarter, net leverage remains manageable at 2.7x (or 2.9x including leases). In addition, the company’s liquidity position provides a broad runway, with R$6.3 billion in cash and an additional R$2.7 billion in revolving credit facilities against specified debt maturities through 2026.
Klabin’s recurring EBITDA growth of +20% year-over-year this quarter once again defied expectations of a cyclical slowdown, as higher realized pulp and paper prices boosted profitability. While cost inflation remains high, with cash costs up +11% qoq, Klabin’s Q4 should continue to outperform continued pulp price strength and better seasonality for its paper products. In addition, the paper and packaging core business has proven its resilience through cycles and will receive a timely boost from the ramp-up of new paper machines in the future. However, the market is excluding a fair bit of pessimism here, with the stock trading at a valuation as low as 6x EV/EBITDA and offering a yield of nearly 7%.
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