Suzano's Strategy for Capturing High Yields in Brazil's Pulp Industry

Suzano, the largest paper and pulp company in Latin America, is a high-yield investment opportunity ahead of a pulp recovery. The company's thesis is simple: plant and harvest eucalyptus in Brazil where there are ideal conditions for production. With low production costs, Suzano can maintain its position in the market and capitalize on the recovery in the pulp industry.

Suzano, the largest paper and pulp company in Latin America, presents a compelling investment opportunity as the pulp industry prepares for recovery. The company's strategy revolves around planting and harvesting eucalyptus in Brazil, where optimal soil, climate, and productivity conditions allow for extremely low production costs. By leveraging these advantages, Suzano can maintain a strong market position and capitalize on the expected recovery in the pulp industry.

Suzano's business model is simple yet effective. The company exports pulp to high-consumption markets, such as toilet paper and tissue in Europe and Asia, and paper for cups and packaging in the US. These markets offer stable demand, providing a robust foundation for Suzano's operations. Additionally, the company's investments in renewable paper are aligned with the growing market preference for sustainable alternatives to plastic.

Despite the cyclical nature of the industry, Suzano's ability to generate significant free cash flow and maintain a healthy yield underscores its resilience. The company's recent financial results indicate a notable increase in volume and revenues, driven by the new Ribas do Rio Pardo mill. However, the consolidated bottom line was not as strong due to pulp prices being under significant downward pressure, primarily influenced by exchange rate variations.

Looking ahead, the global context for pulp is one of moderately growing demand, particularly in packaging and tissue. Realized prices are expected to show greater stability and modest recovery in the second half of 2025 as supply and demand adjust. Suzano's strong cash flow generation and attractive valuation metrics make it an appealing investment, especially given the market's current skepticism.

The recent creation of a joint venture with Kimberly-Clark (KMB) for tissue paper products further enhances Suzano's investment thesis. This partnership adds 22 factories in 14 countries to Suzano's operations, providing access to premium brands and reducing dependence on the Brazilian market. The deal is expected to generate cost synergies and increased EBITDA, without adding pressure to leverage.

Valuation metrics indicate that Suzano is trading at a forward EV/EBITDA of ~6x, slightly above its historical average but still attractive compared to the sector's ~10x average. The company's free cash flow yield of 20% is well above its historical range, reflecting a sizable discount. This discount is driven by perceptions of currency risk and the pulp/paper market, presenting an opportunity for investors to gain exposure before the commodity cycle shifts upward.

While risks, such as exchange rate volatility and pulp price pressures, remain significant, Suzano's robust cash generation and operational performance provide a solid foundation for a long position. The company's ability to generate consistent pulp volumes and relatively resilient prices supports the thesis of an attractive investment opportunity.

References:
[1] https://seekingalpha.com/article/4814447-suzano-capturing-high-yields-ahead-of-a-pulp-recovery
[2] https://www.ainvest.com/news/divergent-paths-capital-reallocation-stagnant-european-infrastructure-high-growth-latin-american-markets-2508/