Suzano Seen Cheap After 112% Advance: Corporate Brazil

Suzano Papel e Celulose SA, the company with the cheapest stock in Latin America, is a buy at Banco Bradesco SA and Coinvalores on prospects a new plant will bolster earnings at the Brazilian paper maker.

While the shares have more than doubled since July 2012, their valuation remains 86 percent below a five-year average as analysts ratchet up earnings estimates, according to data compiled by Bloomberg. That’s the biggest gap between current and historical multiples among 296 Latin American stocks rated by at least five analysts. The stock rallied the most in three weeks yesterday, trimming this year’s drop to 8.3 percent.

Suzano’s shares have rebounded from a decade low amid speculation revenue from the Maranhao mill, which started operations in December after a $3 billion investment, will help the company boost earnings and service its debt. After two years of losses that helped sink its stock valuation, Brazil’s most-indebted pulpmaker will post a profit in 2014, based on the average of 10 analyst estimates tracked by Bloomberg.

“When Suzano announced plans for the Maranhao plant, people were anticipating it would suffer from the impact that the investment would have on its balance sheet,” Sandra Peres, an analyst at Coinvalores brokerage, said in a phone interview from Sao Paulo. “Now the company is starting to benefit from such a big investment.”

Suzano will post profit of 428.3 million reais ($193 million) this year after a loss of 220.5 million reais in 2013, according to the average analyst estimate in a Bloomberg survey. Revenue at the Salvador, Bahia-based company will jump 28 percent to 7.3 billion reais, the highest since at least 1992, the data show.

Suzano’s Stock

The stock has rallied 112 percent in the two-year period ended yesterday, compared with a 6 percent advance for the Ibovespa equity benchmark. The shares advanced 3.8 percent to 8.79 reais at the close in Sao Paulo.

The funding used to set up the mill in the northeastern state of Maranhao has pushed Suzano’s net debt to 4.6 times earnings before interest, taxes, depreciation and amortization, or Ebitda. That compares with an average of 2.08 for Latin American companies, according to data compiled by Bloomberg.

The company is considering selling bonds to buy back more expensive debt and extend maturities, Chief Executive Officer Walter Schalka said in a May 12 telephone interview from Sao Paulo. In two years, its net debt has jumped 66 percent to a record 9.36 billion reais, data compiled by Bloomberg show.

A Suzano spokesman said in an e-mail that the company wouldn’t comment on stock performance.

‘More Significant’

“We continue to like the deleveraging story,” Alan Glezer and Arthur Suelotto, analysts at Banco Bradesco’s brokerage unit, wrote in a June 24 research note. “With a more significant contribution from the Maranhao mill, pulp volumes should show progress.”

Bradesco Corretora is among the 11 firms out of 17 tracked by Bloomberg that have a buy recommendation for Suzano’s shares. The analysts surveyed project an average 26 percent rally for the stock over the next 12 months.

This year’s decline in the shares points to investor concern that the start-up of the new plant will put further pressure on pulp prices, according to Victor Pena, an analyst at Banco do Brasil SA’s investment unit.

Benchmark pulp prices have fallen 4.7 percent this year to $733.50 a metric ton, according to Helsinki-based FOEX Indexes Ltd.’s BHKP gauge. The measure had slumped last week to the lowest level since March 2012.

‘Not Clear’

“The best thing to do now is to remain cautious,” Pena, who rates the stock the equivalent of hold, said in a phone interview from Sao Paulo. “It’s not clear what will happen to pulp prices, and we still need to see to what extent the increase in output will help reduce the company’s leverage.”

The Maranhao plant will produce 1.5 million tons a year of pulp, according to the company’s website. That will lift total production capacity to 4.7 million tons in 2015 from 3.2 million last year, the statement said.

The total amount of cash generated by Suzano’s operations will jump to 1.5 billion reais this year from 40.7 million reais in 2013, according to data compiled by Bloomberg.

“As that starts showing in the earnings reports, investors will get more optimistic about the stock,” Coinvalores’s Peres said.

Before it's here, it's on the Bloomberg Terminal.