VCP Beats on Record Pulp Sales

On Friday, Votorantim Celulose e Papel S.A. (VCP), leading Paper Company in Brazil, reported second quarter 2009 results.

During the quarter, pulp sales volumes reached a new record of 516,000 tons, which was 10% above the guidance and 48% higher than the previous quarter and 57% year over year. Paper sales volume was in line with guidance, totaling 90,000 tons, up 13% sequentially and 3% year over year.

During the quarter EBITDA increased 7% sequentially but decreased 24% year over year and reached R$158 million with a 23% margin from 26% in the first quarter of 2009 and 34% in the second quarter of 2008.

The company reported a net financial income of R$465 million mainly due to the appreciation of the Real against the US dollar and its positive impact on debt. Net profit totaled R$533 million, including equity gain derived from the 24.7% stake sale in Aracruz Celulose’s (ARA - Analyst Report) total capital in April and 42.6% in May and June.

The company benefited from the increase in Chinese consumption during the first five months of 2009. Although global market pulp consumption decreased 6.6%, Chinese consumption increased 66%. This helped to reduce the world inventories of pulp producers to 34 days, versus 43 days in March and 50 days in January 2009. Capacity closures and downtimes reduced the supply of pulp by approximately 2.65 million tons in the second quarter.

Weaker world supply and strong demand from China allowed the increase in list prices in June, to US$530/ton Europe, US$590/ton North America and US$520/ton Asia (excluding China, where the net price is US$480/ton).

However, the slower economic growth worldwide and a recession in the U.S. remain a threat to international commodity prices in general and pulp in particular. Moreover, the difficulties in the acquisition of the shares of Aracruz held by Arapar, the huge loss of Aracruz in the currency market and the liquidity problems that this loss will bring are matters of huge concern.

However, based on increase in demand for pulp and paper in China we are maintaining our Hold recommendation on VCP with a target price of US$12.75.