Aracruz Q2 Net Up 127.2%

Yesterday, Brazil-based Aracruz Celulose S.A. (ARA - Analyst Report), the world's largest producer of bleached eucalyptus pulp, reported poor operating results for the second quarter 2009.

Although net operating revenue and EBITDA represented a year-over-year decrease of 12.4% and 42.3%, respectively, the company reported a 127.2% increase in net profit during the quarter. ARA posted a net profit of R$595.5 million (US$373.2 million) versus a loss of R$7.1 in the previous quarter.

Since 69% of the company’s debt is denominated in foreign currency, net profit was positively affected by 16% appreciation of the Real against the US dollar during the second quarter. Net debt fell to R$7,543.0 million (US$3,868.2 million) from R$8,597.2 million in the previous quarter.

The Asian market, which is alone responsible for 44% of the company’s second quarter sales, showed some signs of recovery in the fist five months of 2009. Although global market pulp consumption fell 6.6% until May 2009, Chinese consumption expanded 66%.

Major global producers, who were running their mills at an average of 83% of installed capacity, brought inventories down to lower levels of 34 days of supply in May after a peak of 50 days reached in January 2009. They also announced an increase in pulp price from July 1, 2009, by approximately US$ 30 per ton for all regions, bringing the list price of Europe at US$530/ton, North America at $700/ton, and China at $480/ton. Thus, companies like ARA and Votorantim Celulose e Papel S.A. (VCP) will stand to benefit.

At present, VCP owns 84% of Aracruz’s voting capital. The company’s deal with VCP is positive, but the price paid raises many doubts. VCP paid over R$18.00 (USD7.8 or US$78 per ADR) per ordinary share of Aracruz as opposed to its highest price of R$17.25 reached in June 2008. Moreover, the outlook for the pulp market in the next few quarters continues to be unclear. Thus, we maintain our Hold recommendation on ARA with a target price of US$17.00.