Latam Paper & Forest
A fresh look at the Chileans,
now under IFRS: Upgrade
Josh Milberg, CFA
Research Analyst
(+55) 11 2113-5971
josh.milberg@db.com
Diogo Miura
Research Associate
(+55) 11 2113-5947
diogo.miura@db.com
Upgrading CMPC to Buy; maintaining COPEC as Hold
We are upgrading CMPC to Buy from Hold based on the improving paper/pulp
fundamentals, promising tissue growth prospects and our preference for it over
Copec. We recognize that the Chilean market could see a correction in the
months ahead considering pension fund equity exposure limits, but we believe
CMPC would outperform. To us, CMPC offers a more defensive business mix &
greater earnings visibility than Copec. We are raising estimates and price targets --
new targets offer 21% potential for CMPC vs. 3% for Copec.
Deutsche Bank AG/London
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
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Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1. MICA(P) 106/05/2009
Industry Update
Top picks
COPEC (COP.SN),CLP6,750.00 Hold
CMPC (CAR.SN),CLP16,560.00 Buy
Companies featured
COPEC (COP.SN),CLP6,750.00 Hold
2008A 2009E 2010E
EPS (USD) 0.43 0.39 0.65
P/E (x) 30.0 31.3 19.0
EV/EBITDA (x) 13.1 17.2 12.4
CMPC (CAR.SN),CLP16,560.00 Buy
2008A 2009E 2010E
EPS (USD) 1.57 1.25 2.27
P/E (x) 19.1 24.3 13.3
EV/EBITDA (x) 9.5 12.8 9.2
Global Markets Research Company
Revised estimates and migration to IFRS accounting
We’ve updated our estimates for both companies to reflect our latest pulp price
forecasts, DB’s updated FX projections, and their migration to IFRS accounting.
Individually we’ve also incorporated CMPC’s acquisition of Melhoramentos, and
the 20% Nueva Aldea pulp mill capacity expansion at Arauco (Copec’s wood
subsidiary). We have Copec and CMPC’s EBITDA growing 39% and 45%
respectively in 2010. The most important P&L change with IFRS is that
increases/decreases in the value of biological assets (their forests) are recognized
as gains/losses in the income statement quarterly, whereas under Chilean GAAP
these were recognized once a year in shareholder’s equity.
Growth outlook by segment
Both Copec and CMPC stand to benefit from an improving pulp price environment.
While we continue to expect some cooling of the pulp market later this year on
softening Chinese demand and increasing supply, we have prices recovering
further in 2010 (see figure10), which should drive better profitability. CMPC is also
increasingly a play on upside from its emergence as a leading regional tissue
player (see figure 27). Tissue is defensive and per capita consumption is low in
the region, so we see significant penetration upside in years ahead. We see less
upside in Copec’s non-pulp segments (sawn timber, panels and gas distribution).
DCF-based price targets raised for CMPC and COPEC
We continue to arrive at our price target for Copec and CMPC using a DCF
approach that considers dollar-denominated cash flows for 2009-2018 (page 24).
We’ve revised our WACC down to 9.35% (from a prior 10.35%) on a lower
country risk and a moderately higher weight of debt. Copec and CMPC still have
relatively conservative balance sheets with net debts to next 12 month EBITDA of
near 2.0. Copec is at a 2010 P/E of 19.2, while we have CMPC at 13.3. In the
past 12 months Copec and CMPC have underperformed the IPSA (see figure 2).
Regarding liquidity, CMPC trades $2.3mn per day versus $5.7mn for Copec. Risks
see page 26.
This report changes price target and estimates for several companies under
coverage. For details, please see pages 3-4.