BTG Pactual (BPAC11) recommends buying | I want to invest

BTG Pactual (BPAC11) published this Friday a report on Iranian (EARLY3)pulp and paper company, with a buy recommendation on the stock at a target price of R$ 10. The company’s recent good performance and positive impressions after attending an investor day promoted by the company justify the recommendation.

The company’s shares have been trading at R$7-8 in recent months, with good appreciation compared to the start of the year, but still with upside potential of close to 20% for the price target.

Iranian quotations (RANI3) over a period of one year – Source: Google

Analysis of BTG Pactual (BPAC1) on Iran (RANI3)

BTG analysts attended the investor day and had a very positive view of the company taking advantage of sector headwinds, with EBITDA more than doubling in 2021 (and sustained in 2022 and likely beyond), which was well above initial expectations.

The event mainly focused on the fundamentals of these solid business trends, with management focused on the company’s paper/packaging business strategy, growth paths and ESG goals. The company continues to see solid medium/long-term growth in its products, driven by e-commerce and plastic substitution trends.

“We continue to see the stock not reflecting this large growth potential,” the analysts said, reporting that the company is considering expansion projects to increase pulp/paper/corrugated production. “We reiterate our Buy recommendation as we continue to see a solid and resilient business cycle for the company in the near-term + invaluable medium/long-term growth, trading at an attractive valuation of ~5x EV/EBITDA 2022E,” the report said. .

The company has an optimistic view of the future

Irani believes that the demand for paper packaging remains very attractive to consumers, due to its recognized ESG attributes (sustainable production process, low carbon emission, biodegradability and high recycling capacity, among other factors).

Plastic substitution trends and the acceleration of e-commerce since the pandemic should keep paper consumption on the rise. “Irani expects e-commerce sales to grow at a CAGR of 20% over 2022-25, which is positive for packaging consumption. Irani expects demand in the global corrugated board market to grow at a 2.2% CAGR through 2035, with Latin America growing at 2.6%,” the report said.

In Brazil, the company expects a CAGR of demand of around 3%, which implies a volume growth close to 120 thousand tons. Irani does not see enough capacity coming on stream in the next few years to fill the gap and expects the market to remain tight going forward.

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ESG presents great potential for success for Irani (RANI3)

The pulp and paper sector has the potential to be a major beneficiary of decarbonization trends, the report points out. “We see a positive impact on consumption in the coming years/decades. The paper production process is very sustainable, it is carbon negative on the production side (22% of fiber intake) and supports circular economy trends in the recycling business (78% of fiber intake),” say BTG analysts.

A has been selling carbon credits since 2005, with a total accumulated revenue of ~R$20 million, and has set several ESG goals that it hopes to achieve by 2030:

  • Be 100% self-sufficient with renewable energy by 2025, which the company hopes to achieve through the development of the GAIA platform;
  • Increase the (negative) balance of carbon emissions by 20%;
  • Achieve 40% women on staff and 50% on the board
  • zero lost time accidents.

Conclusion: a good investment option

The Iranians will soon enter a phase of aggressive growth. The company now has a very healthy balance sheet (close to 1x leverage) and can focus on growth for the first time in years.

Headwinds for Brazil’s corrugated industry should also support near-term stock performance, as we expect the company to maintain its currently high margins. We reiterate our Buy recommendation on Irani as the stock combines solid earnings with strong long-term growth projects, trading at a low valuation of ~5x EV/EBITDA 22.”

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