Pulp Production Installed Capacity 2011-Dec

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1 Million tons Empresas Copec Target Price: CLP Recommendation: Hold Risk: Medium 2012 June 4 Sector: Forestry Analyst: Vicente Meschi vicente.meschi@corpgroup.cl T: Company Information Ticker: COPEC CI Equity Closing Price (CLP/share): M price range: Daily Volume (USD mn): 8,8 Shares (mn): Market Cap (USD mn): Shares / ADR: n/a 12M Stock Performance Copec IPSA 60 jun 11 oct 11 feb 12 Target Price Update Investment Thesis We have revised our target price estimate for Empresas Copec to CLP 7,600 per share for Our Hold recommendation considers a medium risk profile. We updated our forecast analysis of the pulp market to take into account a more volatile macroeconomic environment. Taking into account the investment plans announced in 2012 and the start of operations of the new plant Montes del Plata, project carried out in partnership with Stora Enso, during We believe Arauco has had good timing with this investment, as it will benefit from some quarters of good prices before many of its competitors in Brazil start operating in a lower pulp price environment. This project will increase Arauco s pulp production capacity by 20%. The fuel distribution business commands a solid position in the Chilean and Colombian market and is less exposed to the economic cycle. Energy generation scarcity in Chile suggests diesel consumption will remain high. Relatively high GDP growth rates also suggest that demand for both petrol and liquefied natural gas will show healthy growth rates during 2012 and Additionally, this business gives Empresas Copec significant diversification from the pulp business. Fishing will remain a small business relative to the whole company. Its results will continue to have a minor impact in earnings and Igemar s results will remain low. A change in fishing regulation, however, could have important effects in the business ,8 4,9 Pulp Production Installed Capacity 2011-Dec ,2 3,2 2,9 2,1 2,0 1,9 1,8 1,7 1,7 1,2 Source: Company Reports

2 USD Millions Assumptions Forestry 55% Investments 2012 (USD millones) Fuel 41% Fishing 2% Other 2% Economic problems in the world, especially in Europe, and China s slowdown will affect pulp prices in the medium term. We estimate that new capacity will increase world supply by an average of 3.5% during while world demand will increase by 3.0% (0.75x world GDP growth by IMF s estimate) in the same period. An important amount of capacity will begin operations starting 2013 until 2015, which will translate into pulp prices tending to increase during the rest of 2012 but decreasing during until they stabilize in We calculate the long term price of NBSK pulp (FOEXNBSK Index in Bloomberg) to be 840 USD/ton. Arauco and Stora Enso s project in Uruguay is estimated to begin operations in 2Q 2013 and we expect it will reach full capacity in the following quarter. We believe Terpel will show good results in the next few years. Colombia is a market with high growth potential due to greater infrastructure needs and lower motorization rates compared to Chile. Copec, in the meantime, will maintain moderate growth rates in line with Chile s economic growth. For the fishing business we expect catches to stabilize at low amounts for at least a few years. Low catches and growing costs suggest that the industry will have to continue its adaptation process to current catch levels. We estimate that the business will be minor in relation to Empresas Copec, representing only 2% of consolidated EBITDA in 1Q We also believe increases in fishmeal prices due to low supply. Empresas Copec keeps moderate amounts of debt which is reflected in good risk ratings for its debt. Standard & Poor s and Fitch Ratings both assigned an international rating of BBB+ to the company s debt. Empresas Copec maintains high levels of cash in its balance sheet so we do not foresee any financing complications if additional projects need to be funded. We do expect, however, investment levels to decrease in Debt Amortization Schedule Cash (2012 Mar) Source: Empresas Copec

3 Valuation To estimate a target price for Empresas Copec we used a discounted cash flow model (DCF). The discount rate used was 8.1% in nominal USD, which was calculated using a β of 1.09 (vs. IPSA). The long-term growth rate was estimated at 3.0%. This target price implies an 11.1% increase over current price and a total return of 13.2% after including projected dividends for This return is similar (±5.0%) to our IPSA return estimate, so we have assigned a Hold recommendation to Empresas Copec. Investments Forestry Acquisition of land and forests in order to supply future expansions. Pulp Montes del Plata: 650 th tons/year of pulp in Uruguay. Nueva Aldea: capacity expansion of 170 th tons/year in Chile. Valdivia: mill expansion, 110 th tons/year in Chile. MAPA: construction of plant with 1,500 th tons/year capacity in Arauco, Chile. Panels Moncure: 330 th m 3 /year of MDF in USA. Jaguariaíva: 500 th m3/year of MDF in Brazil. Teno: 300 th m 3 /year of MDP in Chile. Fuels Consolidation of acquisition during Other Guacolda: 5th generation unit in portfolio. Golden Omega: Omega 3 plant for human consumption. Operation e 2013e 2014e Pulp Sales (th tons) Panel Sales (th m3) Saw n Wood Sales (th m3) NBSK Price (avg USD/ton) Arauco Pulp Price (USD/ton) Fuel Sales (mn m3) LNG Sales (mn m3)

4 Empresas Copec Target Price (CLP): Recommendation: Hold Company Description One of the main forestry companies in Latin America. Produces pulp and panels in Chile, Argentina and Brazil. Vertical integration of forestry operation to supply expansion programs. Rapid forest grow th grants cost advantages. Has a significant market share in fuel distribution in Chile and Colombia. Participates in the fishing business, operating along the coast of Chile. Has investments in mining (Minera Can Can, Minera Isla Riesco) and electricity generation (Guacolda, Arauco). Good access to credit (BBB+ rating). Stock price exposed to pulp price, w ith a cyclical nature. Enviromental issues have affected production and could do so again. Profit & Loss Statement (USD mn) e 2013e 2014e Sales Gross Margin Gross Margin % 19,3% 13,4% 13,1% 13,7% 13,1% Operating Result Operating Margin % 11,8% 6,9% 6,1% 6,9% 6,2% EBITDA EBITDA Margin % 15,3% 9,6% 8,4% 8,7% 8,2% Net Financial Expenses Non-operating Result Net Income Controller's Share Net Income (Controller's) % 8,3% 4,4% 4,2% 4,4% 4,1% EPS 0,78 0,72 0,71 0,78 0,74 Balance Sheet (USD mn) e 2013e 2014e Cash & Equivalents Other Current Assets PP&E Other Non-current Assets Property (2012 Mar 31) Total Assets Float 33% Chilean Pension Funds 6% Financial Debt Total Liabilities Total Equity Minority Interest Cash Flow (USD mn) e 2013e 2014e Operating Result Adjusted Taxes EBITDA breakdow n (12M) Depreciation & Amortization Capex Forestry 64% AntarChile 61% Fuel 35% Fishing 1% Δ Working Capital Free Cash Flow Equity Raised (Purchased) Dividends Debt Issuance (Repayment) Comparables P/E EV / EBITDA Ratios e 2013e 2014e CMPC 15,5 9,7 Stock Price (USD) 18,8 13,2 13,2 13,2 13,2 Fibria - 8,0 P / E 24,4 18,7 18,7 17,0 17,8 Suzano - 7,3 Liabilities / Equity 0,8 0,9 0,9 0,9 0,9 Klabin 10,6 7,9 EV / EBITDA 14,9 10,3 11,8 10,8 11,0 Weyerhaeuser 51,2 14,8 EBITDA / Financial Expenses 7,6 6,7 5,1 5,5 5,4 Ence 7,5 3,9 Net Financial Debt / EBITDA 1,7 2,1 2,9 2,5 2,4 ROA 5,2% 4,6% 4,3% 4,6% 4,3% β (vs IPSA): 1,09 ROE 9,4% 8,6% 8,3% 8,7% 8,0% WACC: 8,12% Dividend Yield 1,6% 2,3% 2,1% 2,3% 2,3% Source: CorpResearch, Bloomberg, company financial statements.

5 Glossary Term Definition / Translation Calculation EBITDA EBITDAR Earnings Before Interests, Taxes, Depreciation and Amortization Earnings Before Interests, Taxes, Depreciation, Amortization and Rents Operational Income plus Depreciation and Amortization Operational Income plus Depreciation and Amortization plus rent of fixed assets. It is used the at transport industries to reverse the rent of airplanes or ships. EV Enterprise Value Market capitalization plus Net Financial Debt plus Minority Interest EV/EBITDA Valuation multiple. While greater it is, more expensive it is the stock EV divided by Ebitda FCF Free Cash Flow Operational Income plus Depreciation and Amortization minus tax minus capital expenditures plus (minus) working capital variation. Free-float Margin Operational Ebitda Net Percentage of stocks that can be freely traded in the market Percentage of sales Percentage of stock that does not belong to controller s shareholders. Operational Income / Revenue Ebitda / Revenue Net Income / Revenue P/E Price / Earnings Market Price divided by EPS P/B Price to Book value ratio Market price divided by the accounting value of the stock. Dividend Yield The return in terms of dividends of investing in equities FCF yield Free Cash Flow Return. FCF / Market Price Dividends distributed in a year divided by the market price. ROA Return on Assets Net Income / Total Assets ROE Return on Equity Net Income / Accounting capitalization EPS Earnings Per Share Net Income / Shares outstanding YtD Year to Date Percentage variation year to date x Times Stocks recommendations are established according to the stock yield relative to the IPSA Index. We recommend Hold when we expect the share to have a yield in line with the IPSA; Buy, when the yield expected for the share is above to that expected for the IPSA; and Sell, when the yield expected for the share is below to that expected for the IPSA. We define a yield to be In line with the IPSA when it is within a range whose scope is equivalent to a third of the variation expected for the index, with a 5% minimum.

6 CorpResearch Álvaro Donoso Director CorpResearch Economic Research Sebastián Cerda Executive Director CorpResearch & Economic Studies Nicolás Birkner Senior Economic Analyst Natalie Charles Investment Analyst Juan Ortiz Economic Analyst Equities Research Cristobal Lyon Director of Strategies Vicente Meschi Senior Analyst. Sectors: Banking, Forestry Sergio Zapata Senior Analyst. Sector: Energy Pedro Letelier Analyst. Sectors: Transport, Food & Beverages Andrea Puebla Analyst. Sector: Retail Rosario Norte 660, 17 th floor, Las Condes, Santiago. T: