Fibria Loser in Global Rally on Pulp Overstock: Corporate Brazil

Fibria Celulose SA (FIBR3), the world’s largest pulp producer, is forecast to post the only share drop in the industry because it’s more exposed to an oversupply of the commodity than any of its biggest competitors.

The stock will fall 10 percent in the next 12 months, according to the average estimate of 17 analysts surveyed by Bloomberg. Sao Paulo-based Klabin SA (KLBN4) may gain 0.9 percent in the period, the second-worst performance among the world’s top 25 pulp producers by market value. Shandong Huatai Paper Co., China’s largest newsprint maker, is forecast to rally 99 percent.

Fibria will face tougher competition as global capacity of eucalyptus pulp, used to make paper, expands by as much as 27 percent in the next 18 months, said Kevin Cohen, an analyst at Imperial Capital LLC. Fibria’s sales may increase 1.8 percent in 2013, compared with a growth rate of 3.5 percent for local competitor Suzano Papel & Celulose SA and 15 percent for Shandong Huatai, both of which get at least 55 percent of their revenue from paper and cardboard rather than pulp.

There’s a “tidal wave of new capacity coming,” Cohen said in a telephone interview yesterday from New York. “That’s the wall of worry that investors have to climb if you are out to invest in the story,” he said, referring to Fibria.

‘Pretty Bearish’

The outlook for pulp supply and prices may prompt Fibria, which sells the material to consumer-products makers Kimberly- Clark Corp. and Procter & Gamble Co. (PG), to drop a plan to expand its Tres Lagoas mill as the company seeks to limit investments and sell assets to cut debt. Chief Executive Officer Marcello Castelli said in August that although a final decision about the plant expansion hadn’t been made yet, the plan wouldn’t be submitted to the company’s board this year.

“It’s positive to see the mill being canceled or delayed,” Cohen said. “They are the lowest-cost producer in the world, so if the lowest-cost producer in the world is cutting back on a project, delaying it or canceling it, if they are not moving forward with it, that’s pretty bearish.”

Fibria’s press office declined to comment.

Concern that Brazil’s BNDES state development bank, Fibria’s biggest shareholder, may sell part of its stake after a so-called lock-up period ends may also prevent Sao Paulo-based Fibria from rallying along with rivals.

End of Lock-Up

Some analysts are predicting BNDES may reduce its 30.4 percent stake by as much as two-thirds to as low as 11 percent when the lock-up ends on Oct. 29, said Stephen Atkinson, an analyst with BMO Capital Markets. The bank bought its stake in 2009 as part of a deal in which Fibria, formerly known as Votorantim Celulose & Papel SA, took over rival Aracruz Celulose SA following $3 billion in derivative losses.

“The end of the lock-up could put some pressure on the stock, a lot depending on the outlook for the pulp market,” Atkinson said in telephone interview from Montreal. “If you go back in time, probably the most stupid thing Votorantim did was to buy Aracruz. They overpaid for those assets and have been struggling ever since.”

An official for BNDES, who asked not to be identified in accordance with the bank’s policy, declined to comment on the plans after the end of the lock-up.

Fibria, which has gained 32 percent this year, trades at 0.67 times its book value, data compiled by Bloomberg show. That compares with a ratio of 0.38 for Suzano, whose shares have tumbled 20 percent in Sao Paulo. Pulp prices have gained 15 percent this year as paper makers rebuild stockpiles. Inventories jumped to 38 days of supply in July, up from 34 days at the end of last year, according to Helsinki-based FOEX Indexes Ltd.

‘Improbable’

While the possibility BNDES will sell its stake in the company may hurt the stock’s performance in the short term, the chances of a divestment are low, said Victor Penna, an analyst at Banco do Brasil SA. (BBAS3)

“It’s possible, but improbable,” Penna, who rates the stock a buy, said in a phone interview from Sao Paulo. “BNDES typically holds long-term investments, and they have been supporting the pulp sector for a long time.”

Fibria raised 1.44 billion reais ($711 million) in a share sale this year and used the proceeds to cut debt. Pulp prices are expected to fall to an average of $690 a ton next year from $780 a ton now as new plants will add 4.3 million tons of capacity, Penna said.

“Slowing demand in Europe could be partially offset by a recovery in China,” Penna said. “Though it looks like oversupply will end up tipping the scale.”

First Acquisition

The company agreed to buy a 6 percent stake of Wilmington, Delaware-based Ensyn Corp., a producer of biofuel from wood, for $20 million, Fibria’s first acquisition since 2009, the pulpmaker said in a statement late yesterday.

The companies plan to form a venture in Brazil to produce heating oil, fuels and other chemicals from chip woods, according to the statement. Fibria has the option to raise its stake to as much as 9 percent by investing an additional $10 million and expects the deal to be concluded by the end of this month, the Brazilian company said.

Ensyn is owned by Credit Suisse Group AG (CSGN), Impax Asset Management Ltd. and a unit of Chevron Corp. (CVX), Fibria said in the statement.

To contact the reporters on this story: Ney Hayashi in Sao Paulo at ncruz4@bloomberg.net; Lucia Kassai in em São Paulo at lkassai@bloomberg.net

To contact the editors responsible for this story: Jessica Brice at jbrice1@bloomberg.net; David Papadopoulos at papadopoulos@bloomberg.net

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