Six Packs Help Klabin Weather Paper-Price Drop: Corporate Brazil

Klabin SA, Latin America’s largest papermaker, is beating its top competitors in the Western Hemisphere as its focus on six-pack carriers and milk cartons shield the company from falling paper prices.

Klabin is posting the best risk-adjusted return in the Americas among peers with a market value of at least $300 million, the BLOOMBERG RISKLESS RETURN RANKING shows. The stock has climbed 169 percent in the past three years, for a risk-adjusted return of 5.2 percent. Brazil’s No. 2 papermaker, Suzano Papel & Celulose SA, has slumped 60 percent in the period and a the benchmark Bovespa index is down 23 percent.

The company, the only maker of waterproof cardboard in the region, is benefiting by transforming itself into a consumer stock as a swelling middle class drives demand for beverages and frozen foods. Sao Paulo-based Klabin has doubled its output of paper used in packaging since 2008 and may spend $3.4 billion to make pulp for diapers and feminine hygiene products. Meanwhile, Suzano cut prices for its paperboard and coated-paper products last year amid higher imports.

“While competitors have invested in output of paper -- the commodity -- Klabin boosted output of value-added packaging paper,” Catarina Pedrosa, an analyst at BES Securities, said in an April 15 telephone interview from Sao Paulo. “It was a smart move.”

Omo Soap

The move is helping Klabin, whose paper is used in a range of product packaging from Unilever’s Omo soap powder to BRF SA’s frozen lasagnas, post the America’s highest earnings as a percentage of revenue. Earnings before interest, taxes, depreciation and amortization -- known as Ebitda -- equaled 44 percent of its sales last year, data compiled by Bloomberg show. That compares with 27 percent in 2011. Schweitzer-Mauduit International Inc., a U.S.-based maker of fine papers for the tobacco industry, had the second-highest Ebitda-to-sales ratio in 2012 at 25 percent.

Klabin is seen as a “consumer growth story instead of a commodity player,” Alan Glezer, an analyst at Banco Bradesco SA’s brokerage unit, wrote in a report on April 9. That position is helping the “company navigate through a volatile environment for commodities.”

Economic Slowdown

Demand for consumer goods in Brazil has withstood an economic slowdown as minimum-wage gains and record-low interest rates propelled retail-sales growth past that of other industries. Gross domestic product grew 0.9 percent in 2012, the second-worst performance in 12 years, while domestic consumption expanded 3.1 percent, according to the national statistics agency.

Klabin’s 30-day historic volatility, a measure of price swings, rose to 29.8 percent yesterday from this year’s low of

20.6 percent on Feb. 6.

The average prices for paper sold by Salvador, Brazil-based Suzano in Brazil fell 6.7 percent in the fourth quarter of 2012 from the first quarter of 2011, according to a statement from the company.

Klabin declined to comment about its share performance when contacted by Bloomberg News. Suzano’s press office decline to comment on the company’s pricing policy and stock performance.

Klabin is further expanding its exposure to the consumer sector with plans to invest in a new pulp plant in Brazil’s southern state of Parana. The plant, slated to start in 2015, is expected to produce 1.5 million metric tons of pulp, including water-absorbent fluff pulp, used in diapers.

Ambitious Spending

The company’s investment plan may prove too ambitious if a deeper slowdown in Brazil hurts consumption, said Victor Penna, an analyst at Banco do Brasil SA. Policy makers today may lift the benchmark Selic rate from a record low to fight inflation that exceeded the upper limit of the central bank’s target for the first time since November 2011.

“They have a sizable investment coming, and the outlook for the Brazilian economy is not as bright as in past years,” Penna said by phone from Sao Paulo.

Klabin’s shares have also gained in the past few years as the company’s new management, led by Chief Executive Officer Fabio Schvartsman, who took over in 2010, cuts costs to boost profit margins, said Eduardo Carlier, head of core equities at Schroder Investments.

“The market gave a vote of confidence to the new management, and they’re showing that they can carry out a successful turnaround in the company,” Carlier said by phone from Sao Paulo. “Klabin is showing more discipline managing its costs, and that boosts investors’ confidence in the stock.”

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