P&P Initiation 2016

Pulp & Paper | Brasil Plural Equity Research |Brasil Plural CCTVM does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the company may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.

October 21st, 2016

Sowing the Seeds of Value

Initiating Coverage on Suzano,Klabin and Fibria

Bernardo Carneiro, CFA

Guilherme Mendes

[email protected]+55 11 3206 8242

[email protected]+55 11 3206 8266

Pulp & Paper | Brasil Plural Equity Research |

Summary

Investment Thesis 2

The Global Pulp Market 4

The Paper Market Snapshot 7

Pulp & Paper Stocks

Suzano 9

Klabin 17

Fibria 25

Appendix

Macroeconomic Assumptions 34

Global Trading Comps 35

Investment Methodology 36

Content

1


We are initiating coverage on the Brazilian pulp and paper industry at a moment when stocks are beaten down, and we adopt a contrarian philosophy. Brazilian players enjoyenduring competitive advantages, professional management and value-added expansion projects. The negative effects of falling pulp prices, the stronger BRL relative to theUSD and downward consensus revisions are creating a great entry point for investors – with the exception of Fibria. We use a bottom-up investment methodology (our “FivePrinciples Approach”) and the margin of safety concept1 , leading us to be very selective in stock picking. We determined our ratings through a combination of scores in eachinvestment principle and three valuation tools: 2018E FCF yields (which seem normalized after large expansion budgets in 2016-2017), the implied IRR of the stocks and DCF-based target prices.

Suzano is our top pick in the pulp and paper sector for the highest implied IRR, consistent cash generation, compelling multiples, diversified revenues and a strongbalance sheet. The stock seems out of favor – consensus estimates are falling – which provides a great entry point. According to our estimates, the stock is trading at a 2018EFCF yield of 11%, supporting our recommendation. In our view, Suzano’s integrated model, brand reputation, professional management and ongoing cost reduction initiativesshould help to offset volatility in pulp prices and the FX rate, supporting stable free cash flows over the next five years. After a period of expansion, the company improved itsbalance sheet – leverage is now at 2.4x ND/EBITDA, the strongest balance sheet in the sector.

Klabin operates the best and safest business model in the sector, and obtained two “strong” scores in our investment methodology (see page 17). The company has a strongbusiness profile and we highlight its solid competitive position, the foundation of its goodwill and its brand recognition. The ramp-up of the Puma unit and the conclusion ofinvestments should allow for rapid deleveraging (4.5x net debt/EBITDA in 16E and 3.0x in 17E), strong FCF and rising ROIC in the years that follow. The stock is currently trading at 11%FCF yield 2018E, which is inexpensive. Our valuation model resulted in a R$21 TP and a real IRR of 9% that is above inflation-adjusted bonds, the main reason for our Overweightrating.

Investment Thesis

Suzano Is Our Top Pick, Followed by Klabin

Source: Brasil Plural ResearchNote: 1. As famously discussed by Seth Klarman, Baupost Group’s chairman in “Margin of Safety: Risk-averse Value Investing Strategies for the Thoughtful Investor” , Harper Business, 1991 2

Coverage Summary

Ticker Rating Price TP Upside Real IRR FCF Yield 18E

Suzano SUZB5 OW 10.1 15.0 49% 12% 11%

Klabin KLBN11 OW 16.1 21.0 30% 9% 11%

Fibria FIBR3 EW 22.7 24.0 6% 5% 7%


Fibria has average scores across our Five Principles and we think the stock should be range-bound in the near term, as earnings and cash flows should take some time torebound – it is too early for a bullish stance. Moreover, there is room for additional consensus earnings downgrades in view of the higher debt ratios during 2017 andnegative forces from abroad, i.e, the appreciating BRL and lower pulp prices. In fact, Fibria has the greatest elasticity to BRL variation and pulp prices among the sector – forevery R$0.10 variation in the BRL impacts 2017E EBITDA by 6.7%, while a US$30/t change in pulp prices moves it by 10%. The current expansion phase is also adverselyaffecting the company’s financial ratios and balance sheet – we expect net debt-to-EBITDA to rise and exceed 5.0x in 2017. The stock trades at only 7% FCF yield projected for2018, when capex should start to normalize, which is below the risk-free rate in the futures market. We think that Fibria’s stock will become out of favor sometime during2017. We come up with an Equal Weight rating, R$24 target price and 5% implied IRR in real terms, which does not seem a sufficient margin of safety when consideringrisk-free inflation-linked notes in Brazil, unpredictable earnings growth, low cash-adjusted ROIC, volatile cash flows and an average business profile.

We developed a proprietary and unique investment methodology, combining concepts espoused by Warren Buffet, Pat Dorsey, John Templeton, Philip Fisher and JamesMontier, among other legends of stock investing, and tried to summarize our investment thesis into Five Principles. For further details on our methodology, please refer topage 36.

Investment Thesis

Not Enough Margin of Safety for Fibria

Source: Brasil Plural Research

* Business (earnings visibility, low volatility in business, competitive advantages, and corporate governance); Financial (CROIC, solid free cash flows, and dividends/share buybacks); Growth (insulation frommacroeconomics, structural demand/new markets, and consolidation opportunities); Trading (news flow, short-term results, and “out of favor” status); and Valuation (FCF multiples, implied IRR, DCF target price andtrading comps – which frame the margin of safety requirement). Each stock is scored differently on each principle. In general, we require a high margin of safety for an Overweight recommendation if the company hasweak scores in Business, Financial or Growth principles.

3

The Five Principles Approach*

Business Financial Growth Trading Valuation

Suzano Average Weak Average Out of Favor Overweight

Klabin Strong Average Strong Average Overweight

Fibria Average Weak Average Average Equal Weight


LatAm BEKP (Bleached Eucalyptus Kraft Pulp) producers enjoy solid growth drivers in the export market,backed by a resilient demand for paper in Asia, the expansion of eucalyptus’ market share and ashortage of inexpensive raw material (wood and scrap) in developed countries. In Asia, China’spopulation continues to migrate from rural areas, accelerating the urbanization trend. In fact, recent datafrom the World Bank shows that China’s urbanization rate was close to 60% in 2015, the same level as theUnited States after WWII. The abandonment of a rural way of life and the search for improved livingstandards should increase urbanization and boost overall consumption in China for many years to come,driving demand for tissue and cardboard papers.

This trend, in part, is creating solid demand prospects for low cost, environmentally friendly pulp, ledby the eucalyptus: the revolution in the paper industry brought by the adoption of eucalyptus trees is stillin its early stages. The harvesting cycle is getting shorter, species are becoming weather resistant, andpulp producers continue developing new cloned varieties to mitigate operating risks – particularly climatechange, pest resistance and an improvement in fiber quality, adding to the strength, resistance andflexibility to the fibers.

The Global Pulp Market

Long Live the Eucalyptus

Source: Fibria reports; The World Bank; Brasil Plural Research

China’s tissue consumption should be a leading driver for hardwood (Per Capita Consump. of Tissue - kg/capita/year)

4

Global Pulp Producers (k tons)

25

16 15

11

6 6 5

1

N. America WestEurope

Japan Oceania EastEurope

LatAm China Africa0%

20%

40%

60%

80%

100%

19

60

19

65

19

70

19

75

19

80

19

85

19

90

19

95

20

00

20

05

20

10

20

15

USA China World

Increasing Urbanization Trends in China (Urban Population - % of total)

FibriaArauco

APPAPRIL

SuzanoCMPC

UPM-KymmeneStora Enso

Georgia PacificMetsa Group

IlimIP (excl. Ilim)

WeyerhaeuserEldorado

MercerDomtar

SodraKlabin

Resolute ForestCenibraCanfor

0 2000 4000 6000

Bleached SoftwoodKraft Pulp

Bleached HardwoodKraft Pulp

Unbleached Kraft Pulp

Mechanical Pulp

5,300



Long Live the EucalyptusThe rising demand for low cost, highly productive and certified wood, as well as lesser demand forscrap paper, encourages growing demand for BEKP by paper manufacturers. The trade of wood chipsshould change dramatically in Asia, as China (issues with straw and bagasse), Japan (new power policysupporting clean energy) and OKI (issues with Indonesia forestry) have increased the demand for wood.The share of non-wood pulp in paper manufacturing – mainly bagasse and straw – should continue fallingas the increasing scale of production raises transportation issues and farms emphasize the biofuelmarket. Japan’s government’s moves to provide a stimulus for bioenergy and reduce nuclear powergeneration should fuel demand for wood in the region. Last but not least, APP’s OKI project, starting in2017, should affect wood prices: according to WWF, nearly 55% of APP’s 796,000 ha of forest is onpeatlands, which are flammable and fragile.

There is also a general shortage of high quality scrap, particularly white scrap, as the consumption ofP&W paper slows globally. Moreover, the price competition with falling virgin fiber prices reduces theincentive to invest in de-inking facilities, lowering the demand for scrap. Finally, faster growth in thetissue segment relative to other papers fuels the demand for virgin fiber to the detriment of scrap.

Pulp producers have been moving beyond cost leadership in order to improve profits, andmanagement’s strategy now includes customer retention and innovation. For instance, they offer tomanage customer inventories, improve the performance of their machines by developing tailor madefiber composites, save customers administrative expenses, deliver pulp right into the entry box of thepaper process, etc. Brazilian pulp producers are innovating and developing new applications, and wehighlight fluff pulp, biofuel and the nanocellulose. In Brazil, Klabin’s Puma new mill is the first one toproduce fluff pulp based on softwood, primarily destined to local tissue producers in a strategy to replaceimports. In our view, consolidation among hardwood producers is a logical strategy in order to disciplinethe pulp market, allowing for better visibility in prices and improving supply-and-demand dynamics.However, M&A in Brazil should only flourish when players collapse due to financial and controllingshareholder issues, ultimately breaking emotional ties to these family-owned companies.

Main LatAm Pulp Producers

Source: Brasil Plural Research 5

Forestry

Facilities

Fibria

Suzano

Klabin

CMPC

Eldorado

Cenibra

Arauco


We anticipate hardwood prices to remain stable in 2017 relative to the end of 2016 (FOEX Europe at US$701per ton), and to hold steady in 2018 despite oversupply risks, lackluster global growth and the entrance ofnew capacity, primarily in Brazil and Indonesia. We expect a slow ramp-up on APP’s OKI facility, producingone million tons in 2017 (an average HW project takes around nine months to fully ramp-up) and shut-downsto sustain BEKP prices into 2018. In our view, the fears of oversupply in the short term are dissipating – in fact,Suzano and Fibria’s recent price hikes (+US$20 per ton) confirm our opinion. In 2018, both OKI and Fibria’sHorizonte 2 projects should add around 2.65mn tons of new capacity, while Eldorado plans to add 2.3mn tonsby 2020 from its Vanguarda 2.0 Project. Given the lack of visibility in projecting capacity shutdowns, we areunderestimating the closures by using the historical average of 400 ktons/year, i.e., the oversupply scenario in2017/18 is conservative in view of the currently low price of hardwood.

The shut downs of pulp capacity, particularly in high cost regions, has been quite slow recently despite pulpprices close to their cash costs. Many players have integrated facilities, transferring profits to the paper unit,while others wait for higher pulp prices. According to Poyry Management Consulting, 3.8 million tons of pulpcapacity should shut down by 2021 due to i) high costs, ii) closure of ancillary assets, iii) delays and iv) slowstart-ups. For instance, straw-based pulp mills should lead the closures in Asia, as cash costs usually exceedUS$550/ton. Scandinavian and Canadian producers are also struggling in this low price environment.


A Word on Pulp Prices

Source: Fibria; Poyry; Risi; PPPC; Brasil Plural Research

20

30

40

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60

70

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g-0

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g-1

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g-1

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g-1

6

HW Pulp Inventories (Days) Average

HW Inventories Above Historical Levels

We Expect Flat Prices on the Back of Continuous Capacity Increases

6

Valdivia

Hainan

VeracelNueva Aldea

Santa Fe II

Mucuri

Fray Bentos

Kerinci

Três LagoasRizhao

GuangxiChenming Zhanjiang

EldoradoImperatriz

Montes del Plata

Oji Nantong

Guaíba IIPuma

Horizonte 2

0

100

200

300

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1,000

0

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1,000

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BH

KP

Pri

ce(U

S$/t

on

)

Pro

du

ctio

nC

pac

ity

(th

. to

ns/

y)

Horizonte 2 + OKI

OKI

APP’s OKI project, as well as other Asian green fields, are expensive, depend on third-party wood supply and accordingly set a floor for global pulp prices (i.e., marginal cost producers).

000 tons 2016E 2017E 2018E 2019E 2020E

(+) Capacity Increase 1,460 1,740 2,650 1,000 1,300

(-) Closures (480) (315) (400) (400) (400)

(=) Net Expansion 980 1,425 2,250 600 900

(+) ∆ Demand 1,200 1,092 1,130 1,170 1,211

BHKP Demand 31,200 32,292 33,422 34,592 35,803

% Growth 3.5% 3.5% 3.5% 3.5%

Oversup./(shortfall) (220) 333 1,120 (570) (311)

We Anticipate an Oversupply of Short Fiber in 2017-18


The paper manufacturing business is less volatile and shows higher correlation to Brazilian GDP when compared to the pulp segment. As Brazil recovers from the economicrecession, we expect paper demand to rebound following increasing industrial activity in 2017, while the BRL appreciation – Brasil Plural economic team estimates BRL at R$3.0by year-end – should likely increase competition with imports, primarily in the printing and writing segment.

The consumption of paper on a per capita basis in Brazil is very low when compared to developed countries, which supports our view that fast GDP growth and socialimprovement should narrow this gap in the long run. However, some features of the Brazilian economy limits the demand for paper, particularly exports, as the shipping ofcommodities do not require corrugated boxes and cardboard, unlike manufactured products.

While the decrease in pulp prices has helped non-integrated players, the hike in recycled paper prices provides a partially offset. Weak economic activity lowers the consumptionof paper, which translates into lower availability of scrap, pressuring prices upward. As a consequence, OCC (i.e, paper scrap in packaging) prices in Brazil increased 75% YTD,reducing margins of non-integrated players in the cardboard and corrugated box segments. According to our channel checks, small producers of boxes are operating withmargins close to zero. Looking forward, we anticipate another increase in OCC prices, following seasonality effects.

In our view, there is room for consolidation in the corrugated box segment. The top three players (Klabin, Rigesa and Jira) have only ~30% of market share – the same as a decadeago. In comparison, the top three US corrugated box producers hold more than 60% of the market vs. 30% two decades ago. Klabin is the most logical consolidator, but we do notexpect large M&A operations in the short-term given the company’s focus on the ramp-up of the pulp unit followed by adding a new cardboard machine.

The Paper Market

A Deeper Look Into the Paper Market

Source: ABPO, Risi; United Nations, Brasil Plural ResearchNote: 1. Based on 2015 data

OCC Prices are Up 70% YoY, Hurting Non-Integrated PlayersPaper Consumption per Capita is Still Underpenetrated in Brazil

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usa

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Corrugated Board Shipments (tons) - LHS OCC Price (R$/ton) - RHS


A high valued added product, combiningdifferent layers of papers and mix of scrapand virgin fiber. Klabin and Suzano leadthe market with an integrated – and moreprofitable – model, followed by Papirus,Ibema and MD Papeis. Klabin dominatesthe liquid packaging boards market givenits first-mover advantage and plentifulsupply of low-cost softwood. There arehigh barriers of entry and significantswitching costs in the segment, givendetailed specifications of quality andweight. The increasing economic activityin 2017 should encourage strongerdemand for packaging paper. Pricingdynamics have changed since non-integrated players suffer cost pressuresfrom recycled materials – historicallyKlabin and Suzano used to lead pricehikes.

The Paper Market

Market Segmentation in Brazil

Source: Klabin; Papirus; International Paper; Brazil Central Bank; Ibá; SNIC; Brasil Plural Research

Cardboard Market Share

The uncoated segment is dominated bySuzano and International Paper, anddemand is correlated to GDP growth. Inthe coated market, Suzano is the largestplayer and faces competition from foreignplayers. Publicity materials push thedemand for coated paper, which tends tohave higher elasticity to GDP. In bothcases, international prices determinedomestic prices, and so the FX rate has agreater influence over pricing in thissegment. There is also strong seasonalityin the second semester followingincreased production of books andnotebooks related to the start of theschool year.

A very fragmented segment with room forconsolidation. Competition is regional asthe freight costs to ship longer distanceswould make those products non-competitive. Low barriers of entrystimulate newcomers. We expectshipments to increase in 2017 followingstronger industrial production.Meanwhile, the surge in OCC prices (up75% YTD) should continue to hurt non-integrated players, possibly acceleratingthe consolidation process as small playersare not profitable – we recall that OCCrepresents approximately 65% of the costsin the production of corrugated boxes fornon-integrated manufacturers.

The main customer of industrial bags inBrazil is the civil construction sector –sacks for cement represent more than70% of total sales. According to SNIC(Brazilian Union of Cement Industries),cement sales dropped 13% YTD, whichforced producers to explore the exportmarket. Cement sales in Brazil have apositive correlation of 1.5x GDP, andaccordingly industrial bags sales shouldsoar with the expected economic recoveryin 2017. The segment is veryconcentrated, with Klabin holding morethan 50% market share.

Cardboard Printing & Writing Corrugated Box Industrial Bags

BRL vs. P&W Imports Corrugated Box Market Share Cement Sales vs. GDP Growth

8

Klabin, 30%

Suzano, 30%

Papirus, 13%

Ibema, 13%

MD Papeis,

5%

Others, 9%

0%

10%

20%

30%

40%

2.0

2.5

3.0

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4.5

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BRL (LHS) % P&W Imports (RHS)

Klabin, 17% Rigesa (WRK),

8%

Orsa IP, 7%

Trombini, 6%

Irani, 6%Penha, 5%

Smurfit Kappa, 4%

Others, 47%

-10%

0%

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ion

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Cement Sales LTM- Domestic Mkt (tons) - LHSIBC-Br YoY % - RHS


Suzano

Our Top Pick – Initiating with OverweightWe are initiating coverage on SUZB5 with an Overweight recommendation and R$15 TP, supported by a real IRR of12%, considerably above inflation-linked bonds. The stock price slumped 47% since October 2015, well beyond whatfundamentals dictate as evidenced by compelling valuations. The stock seems out of favor – consensus estimates arefalling – which provides a great entry point. According to our estimates, the stock is trading at a 2018E FCF yield of 11%,supporting our recommendation. In our view, Suzano’s integrated model, brand reputation, professional managementand ongoing cost reduction initiatives should help to offset volatility in pulp prices and the FX rate, supporting stablefree cash flows over the next five years.

Suzano’s focus is on reducing its cash costs and developing new product lines in order to lower its exposure to the FXrate and pulp-price volatility. The initiatives include the production of lignin, tissue and fluff pulp (from hardwood) andinvestments in transgenic clones. Project 5.1 establishes industrial modernization and debottlenecking processes inorder to increase total pulp capacity (including integrated volumes) to 5.1 million tons in 2018 (currently at 4.7 milliontons) and dilute fixed costs. Management plans to lower cash cost per ton to US$125 in 2022, which we think isaggressive. The paper business – responsible for 40% of revenues – helps Suzano to have less volatile results, backed bydomestic-driven demand and the competitive advantages of an integrated model. After a period of expansion, thecompany improved its balance sheet – leverage is now at 2.4x ND/EBITDA, the strongest balance sheet in the sector.

SUZB5| Snapshot

Source: Bloomberg; Brasil Plural Research

Performance

Suzano is the second-largest short-fiber pulp producer inthe world and one of the top players in the P&W andcardboard paper segments in Brazil. It holds an overallmarket share of 40% and generates over R$10 billion inrevenues. The company has five industrial facilities in thestates of Maranhão, Bahia and São Paulo, all surroundedby forestry assets, totaling 600 thousand hectares.Suzano has large exposure to the export market, asnearly 70% of revenues come from foreign clients inEurope, Asia and the US.

Company Description

9

Stock Rating: Overweight

YE 2017 Target Price: R$15/share

Price (October 20th, 2016): R$10.2/share

IRR (real): 12%

Market Cap (R$ million): R$11,270

Avg. Daily Value (R$ thousands): R$48,015

52-Week Range: R$9.2 - R$19.3

Suzano 5 PrinciplesPrinciple Summary Score

BusinessSuzano is well positioned to compete in both pulp and paper businesses. The company is fully integrated, has a diversifiedproduction line, a proprietary distributor in the P&W segment, strong brand equity, a fragmented client base and is developingnew business segments. However, it is exposed to the volatility of the BRL and pulp prices. Corporate governance is average.

Average

Financial

The company has a weak history of cash generation, low ROIC, insufficient dividends and consumes significant working capital.The weaker BRL and the capacity increase from the Imperatriz pulp mill amid high pulp prices have improved results since2015. The company’s balance sheet is healthy, cash generation is solid and it seems the company is on track to obtain aninvestment grade rating.

Weak

Growth

Suzano has a remarkable history of revenue and earnings growth, but with adverse effects on the balance sheet, dividends andROIC. From now on, earnings growth should come from smaller projects, such as new capacity in tissue and fluff, value-addedapplications of lignin and debottlenecking measures to reduce cash costs. Its Project 5.1 should increase pulp production andwhile reducing exposure to the BRL.

Average

TradingThe stock plummeted 47% in the last 12 months, hurt by the negative effect of falling pulp prices, the recent appreciation ofthe BRL and fears of oversupply of hardwood pulp (i.e., APP’s OKI mill in Indonesia). SUZB5 is covered by 18 brokers, has a dailyaverage volume of R$70mn and consensus estimates for 2017 continue falling.

Out ofFavor

Valuation

Suzano is our top pick in the pulp and paper sector as the stock offers a significant margin of safety according to threevaluation tools: a DCF-based R$15 price target; an 12% real IRR – the highest in the sector – and a 11% FCF yield 2018E. In ourview, Suzano’s integrated model, diversified revenues, professional management and ongoing cost reductions should help tooffset the volatility in pulp prices and the FX rate.

Overweight

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Suzano Ibovespa


Suzano is well positioned to compete in both the pulp and paper businesses. The company is fully integrated, has a diversified production line, strong brand equity inpaperboard and P&W, a fragmented client base and is developing new business segments. However, it has substantial exposure to the volatility of the BRL and pulp prices,which reduces visibility in terms of future earnings. The largest customer accounts for 10% of consolidated revenues and the company is exposed to China, which providescirca 22% of revenues.

Suzano dominates the P&W segment together with International Paper, with the two companies holding ~80% market-share in the uncoated segment, providing pricingpower that is not offered in the more intensely competitive coated paper segment. Suzano’s unique distribution strategy – through its proprietary seller “Suzano +” –allows more and better services for customers, wider reach and cross-selling opportunities.

Suzano has three classes of shares, with the most liquid being the class A, SUZB5. Ten people from the Feffer and Guper families share control of the company throughSuzano Holding and direct stakes, totaling 56% of the total capital. The Board of Directors is comprised of nine members, of which five are independent from the controllinggroup and met 22 times during 2015. Variable compensation represents more than 75% of management’s total payroll – Board members are also eligible for a performancebonus, which is unusual – and the company adopts long-term incentive plans, including phantom shares and stock options. We appreciate that top management holdsnearly 0.5% of the total capital.

Suzano – Business

Strong Competitive Advantages

Source: Company Reports; Brasil Plural Research

Revenues Breakdown (2017E)

10

Pulp Revenues Breakdown Paper Revenues Breakdown

Pulp; 60%

P&W; 31%

Cardboard; 8%

Other; 1% Domestic;

12%

As ia; 40%Europe;

33%

North America;

14%

Others ; 1%

Domestic; 64%

South/Central America; 17%

North America;

10%

Europe; 4%

Other; 5%


According to our methodology and based on IFRS audited financial statements,Suzano has weak financial scores. The past six years have been marked by large netlosses, lackluster cash generation, low single digit ROIC and excessive workingcapital. We acknowledge, however, that Suzano’s returns and balance sheet werelargely impacted by acquisitions and the construction of the Imperatriz unit. Werecall that Suzano raised new equity in 2012 in the amount of R$1.5bn. The weakBRL and the capacity increase from the Imperatriz pulp mill amid high pulp pricesimproved results in 2015. Looking forward, we anticipate slightly better financialratios, especially in 2018 when capital expenditures normalize. FCF should remainsolid despite adverse FX rates and pulp prices, offset by tax incentives andaccumulated tax credits in the balance sheet (current balance of R$885mn).

Since 2010, returns on invested capital have been below the company’s cost ofcapital. Suzano has a weak history of dividend payments relative to operatingearnings, and the dividend yield ranged between 1-2% (the by-laws determine apay-out ratio of 25% of the net income, but management targets a ratio to FCFs).

Suzano’s aggressive expansion wound down a few years ago, and this is behindthe company’s stronger balance sheet when compared to Fibria and Klabin, bothtwo years later in the de-leveraging game (Suzano is lowering its net debt/EBITDA to2.4x from 5x in 2013). We expect the company to generate stable cash flowssupporting smaller investments in the 5.1 Project. Financial covenants seemcomfortable -- nearly 85% of debt is long term, cash balances exceed maturities untilDecember 2017, and it seems the company is on track to obtain an investmentgrade rating. Export sales partly cover dollar-denominated debt of R$10 billion, theremaining is hedged through derivatives (mainly Zero Cost Collar)

Suzano – Financials

Weak Scores, Low ROIC and Poor Dividends

Source: Company Reports; Brasil Plural ResearchNote: 1. Cash ROIC = (EBIT - t - WK change) / (Total debt + Equity + Minority Interest)

Suzano Key Ratios

Leverage – Net Debt/EBITDA

11

0.0

1.0

2.0

3.0

4.0

5.0

6.0

0

1,000

2,000

3,000

4,000

5,000

2013 2014 2015 2016 2017 2018 2019 2020

EBITDA (LHS) ND/EBITDA (RHS)

KEY RATIOS 2011 2012 2013 2014 2015 2016E 2017E 2018E

EV/EBITDA 7.7x 10.2x 9.6x 8.2x 6.6x 5.1x 6.1x 5.7x

FCF Yield n.m. n.m. n.m. -7.8% 2.0% 10.9% 5.9% 11.0%

Capex to EBITDA 2.5x 2.2x 1.2x 0.6x 0.3x 0.5x 0.6x 0.4x

Net Debt/EBITDA 4.2x 5.0x 4.9x 4.1x 2.7x 2.4x 2.7x 2.4x

CROIC1 1% 2% 0% 1% 6% 11% 8% 6%

Working Capital/Sales 29% 20% 29% 28% 29% 23% 23% 23%


1.11.2

1.8

2013 2016E 2023E

Suzano – Growth

Harvesting After Aggressive PlantingSuzano has a remarkable history of revenue and earnings growth, but with adverse effects on the balance sheet,dividends and ROIC. Two large transactions marked the company’s growth strategy -- the acquisition of Bahia SulCelulose in 2001 and partial acquisitions of Ripasa in 2005 and 2007. In 2015, earnings growth came from the FX ratetailwind and higher pulp prices encouraging export sales. We think that in the short term management will focus onorganic growth, particularly its new capacity in fluff (100ktons/year), tissue paper (+120K tons/year), the productionof lignin and debottlenecking measures.

Suzano’s Project 5.1 will increase pulp capacity to 5.1 million tons from 4.7 million currently (including integrated andmarket pulp), helping to dilute costs, supplying tissue production and increasing shipments to current markets. Theproject also includes investments in biotechnology (through the subsidiary FuturaGene, acquired in 2010), theproduction of fluff pulp from hardwood, the utilization of lignin to replace petrochemicals and two new tissue papermachines. Considering execution risks and potential delays in the start-up, we are not incorporating future projects inour model. While we estimate flat net revenue CAGR over the next few years, FCF should amount to R$1.2bn in 2018,more than tripling since 2015.

Eucafluff: Suzano is the first company to produce fluff out of hardwood by adapting a former P&W machine - the millhas the flexibility to produce one or the other. The company started operations at the end of 2015 and local clients arestill testing the product. After the full ramp-up, the unit should sell 100k tons/year.

Tissue: Suzano plans to add two tissue machines of 60k tons/year, one in Imperatriz and one in Mucuri, by 2H17. Thegoal is to benefit from the pulp production line in the facilities, in a completely integrated model and unlock thebenefits from tax credits in the region (value-added tax credits, or ICMS).

Lignin: Lignin is a component of wood, released during a pre-bleaching phase in the process of producing pulp andgenerating power, usually sold to third parties in the electricity industry. However, lignin can be used as an alternativeraw material for petrochemicals. New products made of lignin could be three times more profitable than the sale ofenergy. The company plans to start producing lignin for the industrial segment by June 2017, with an expectedannualized EBITDA of R$40mn.

FuturaGene: FuturaGene is a global company acquired by Suzano in 2010 to develop genetically modified eucalyptus.According to Suzano, the implementation of genetically modified clones could increase forestry productivity in 20%.Despite optimistic results with transgenic samples, the FSC (Forest Stewardship Council) forbids their commercial use.

Global Fluff Production

Source: Risi; Brasil Plural ResearchNote: 1. Risi estimates

Brazilian Tissue Demand1 (mn tons)

Pulp Production and Cash Cost

12

CAGR: 5%

North America;

90%

Europe; 6%

Rest of the World; 4%

170

175

180

185

190

195

3,000

3,500

4,000

4,500

5,000

5,500

20

15

20

16E

20

17E

20

18E

20

19E

20

20E

20

21E

Total Pulp Production (k tons) - LHS

Cash Cost (US$/ton) - RHS


We look for signs of popularity driving stocks ahead of their fundamentals and adopt a contrarian philosophy – the market tends to perpetuate the status quo and fall intofinance behavior traps. So we study whether the stock is weak and trading out of favor and if the company is facing temporary problems, such as poor short-term earningsprospects, poor newsflow – “bad news is an investor’s best friend” (W.Buffett) – and there is irrational action.

SUZB5 shares plummeted 45% in the last 12 months, hurt by the negative effect of falling pulp prices and a stronger BRL. We believe the stock is out of favor despite itspopularity (average daily volume of R$70mn and covered by 18 brokers), as news flow related to falling pulp prices, sluggish global economic growth and a stronger BRL isaffecting investor sentiment. In addition, there is fewer Buy recommendations now than six months ago. We are closely monitoring the start-up of APP’s OKI project inIndonesia, the largest contributor to supply in the near term. Lastly, the next round of quarterly results will suffer due to high comps from last year and scheduledmaintenance stops, which should keep the stock inexpensive in the very short term.

We examined the evolution of consensus estimates on Bloomberg and noticed sequential downward revisions recently, likely to incorporate lower pulp prices and theadverse FX rate for export sales. We highlight our estimates are below consensus, primarily when forecasting EBITDA and FCFs.

Suzano – Trading

Out of Favor

Source: Bloomberg; Brasil Plural ResearchNote: * Current data as of 10/17/2016

2017E Consensus Evolution (R$mn)Suzano EV/EBITDA 12 Months Forward

13

Short Interest (mn shares)

4

5

6

7

8

9

10

11

12

Ap

r-1

1

Oct

-11

Ap

r-1

2

Oct

-12

Ap

r-1

3

Oct

-13

Ap

r-1

4

Oct

-14

Ap

r-1

5

Oct

-15

Ap

r-1

6

Oct

-16

EV/EBITDA AVERAGE

0

500

1,000

1,500

2,000

2,500

3,000

0

1,000

2,000

3,000

4,000

5,000

6,000

12M 6M 3M Current*

EBITDA (lhs) FCF (rhs)

0

5

10

15

20

25

30

35

40

45

Oct

-13

Feb

-14

Jun

-14

Oct

-14

Feb

-15

Jun

-15

Oct

-15

Feb

-16

Jun

-16

Oct

-16

“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful” (Warren Buffett, “Buy American. I am”. The New York Times, October 16, 2008).


We are initiating coverage on SUZB5 with an Overweight recommendation and R$15TP. The stock offers real IRR of 12% for equity investors, considerably above inflationlinked bonds (i.e., risk free rates) and thus a good margin of safety. Suzano is our toppick in the pulp and paper sector for having the highest implied IRR, consistentcash generation, compelling multiples, diversified revenues and a strong balancesheet. The stock price slumped 47% over the last 12 months, consensus estimatesare falling and, accordingly, valuations have become compelling. We assume a long-term average BEKP price (FOEX Europe) of US$701 to build our five-year DCF and IRRmodels, assuming moderate appreciation of the BRL as determined by ourmacroeconomic team.

We have low conviction in the DCF and IRR methods for the very unpredictablenature of two key input variables, global pulp prices and the FX rate. For everyUS$30 of change in the price curve of HW (flat at US$701/ton), Suzano’s fair valueper share changes by R$2.0. Ceteris paribus, for every 20-cents the BRL depreciatesin each year of our forecasting period, our target price moves by R$4.1 per share.We prefer to utilize short-term, high-conviction valuation metrics, such as tradingmultiples (FCF yields or P/CF). According to our estimates, the stock is trading at2018E FCF yield of 11%, supporting our recommendation.

We determine both our target price and real adjusted IRR’s on free cash flows toequity, calculated in local currency, and apply local discount and growth rates (costof equity and perpetuity growth). Considering Suzano’s exposure to the volatility ofpulp prices, unpredictable FX rates impacting export sales offset by the solidbusiness of cardboard and P&W papers, we combine moderate discount rates withlow perpetuity growth arriving at a rational exit multiple – 1/(Ke-g) – of 13x FCF inthe terminal value calculation. We use a higher exit multiple in Klabin’s valuation –for its lower exposure to commodities and stronger scores – and a lower multiple forFibria, for its dependence on pulp prices and the FX rate.

Suzano – Valuation

Suzano Is the Most Undervalued Stock in P&P

Source: Brasil Plural Research

2017E EBITDA Sensitivity to Pulp Prices and BRL Every R$0.1 variation in BRL impacts EBITDA in 6.5%, while a US$30/t change in pulp pricesmoves EBITDA by 7%

DCF and IRR Calculation

14

Avg. BRL 2017E

2.86 2.96 3.06 3.16 3.26

BH

KP

20

17

E

761 3,248 3,477 3,706 3,935 4,163

731 3,047 3,269 3,491 3,713 3,934

701 2,846 3,061 3,276 3,490 3,705

671 2,645 2,853 3,061 3,268 3,476

641 2,444 2,645 2,845 3,046 3,247

R$ million 2017E 2018E 2019E 2020E 2021E

EBITDA 3,276 3,390 3,693 4,058 4,281

(-) Change in Working Capital 81 (63) (126) (141) (119)

(-) Capital expenditures (1,956) (1,263) (1,320) (1,379) (1,730)

(-) Taxes - (188) (289) (365) (409)

(-) Net Financial Expenses (752) (657) (589) (560) (506)

Free Cash Flow to Equity 649 1,219 1,368 1,613 1,518

Equity Value 16,487

Shares Outstanding (Mn) 1,095.2

Price Target (R$) 15.0

Curr. Mkt Cap 2017E 2018E 2019E 2020E 2021E Perpetuity

(11,050) 649 1,219 1,368 1,613 1,518 19,274

Implied IRR, Real = 12%


Suzano

Financial Statements

Source: Company Reports; Brasil Plural Research 15

Income Statement (R$ million) 2011 2012 2013 2014 2015 2016E 2017E 2018ENet revenues 4,848 5,192 5,689 7,265 10,224 9,878 9,277 9,537 Cost of Services 3,764 4,028 4,190 5,356 6,184 6,367 6,574 6,785 Gross Profit 1,084 1,164 1,498 1,909 4,040 3,511 2,703 2,752 Gross Margin 22.4% 22.4% 26.3% 26.3% 39.5% 35.5% 29.1% 28.9%Total Operating Expenses 408 620 523 679 970 815 835 860

Sales expenses 248 248 251 301 410 341 325 334 G&A Expenses 334 404 377 393 456 291 325 334 Tax Expenses - - - - - - - -Other expenses (174) (32) (105) (14) 105 160 158 162 Amortization of intangibles - - - - - 24 28 30

Operating Income 676 544 976 1,230 3,070 2,695 1,867 1,893 Operating Margin 14.0% 10.5% 17.1% 16.9% 30.0% 27.3% 20.1% 19.8%Depreciation and Amortization 625 727 889 1,216 1,419 1,297 1,408 1,497 EBITDA 1,302 1,272 1,865 2,446 4,489 3,992 3,276 3,390 EBITDA Margin 26.8% 24.5% 32.8% 33.7% 43.9% 40.4% 35.3% 35.5%Net Financial Income (775) (855) (1,256) (1,594) (4,429) 1,047 (515) (838)

Financial Income 525 295 246 265 285 243 305 267 Financial Expenses 1,300 1,151 1,502 1,859 4,714 (805) 821 1,105

Non-operational income - - - - - - - -Pre-Tax Income (98) (311) (280) (364) (1,359) 3,742 1,352 1,055 Income Taxes 128 129 60 102 433 (423) (251) (278)Minority Interest - - - - - - - -Net Income 30 (182) (220) (262) (925) 3,319 1,101 777 Net Margin 0.6% -3.5% -3.9% -3.6% -9.1% 33.6% 11.9% 8.1%EPS 0.08 (0.17) (0.20) (0.24) (0.84) 3.03 1.01 0.71

Cash flow statement (R$ million) 2011 2012 2013 2014 2015 2016E 2017E 2018EEBITDA 1,302 1,272 1,865 2,446 4,489 3,992 3,276 3,390 (-) Change in working capital (247) 211 (429) (498) (1,113) 170 81 (63)(-) CAPEX (3,247) (2,784) (2,257) (1,359) (1,458) (2,100) (1,956) (1,263)

(-) Taxes (330) (418) (471) (456) (517) (40) - (188)FREE CASH FLOW TO FIRM (2,523) (1,718) (1,292) 132 1,402 2,022 1,401 1,876

(-) Net financial expenses (316) (761) (873) (909) (1,061) (815) (752) (657)FREE CASH FLOW TO EQUITY (2,839) (2,480) (2,165) (777) 341 1,207 649 1,219

(+) Increase in debt 1,587 1,975 2,158 884 950 - - -(+) Other 944 1,651 (541) 12 (2,259) - - -

(+) Capital increase - - - - - - - -(-) Dividends (154) (83) (100) (122) (270) (300) (195) (366)

CHANGE IN CASH POSITION (462) 1,064 (648) (4) (1,238) 907 454 853 Cash and equivalents 3,274 4,338 3,690 3,686 2,448 3,355 3,809 4,662


Suzano



Balance Sheet (R$ million) 2011 2012 2013 2014 2015 2016E 2017E 2018E

Current Assets 5,344 6,687 6,472 6,609 6,589 6,670 7,067 8,008

Cash and Eqiuv. 3,274 4,338 3,690 3,686 2,448 3,355 3,809 4,662

Accounts receivable 1,041 1,103 1,474 1,207 1,886 1,646 1,546 1,590

Inventories 636 684 905 1,077 1,316 1,326 1,370 1,414

Tax credits 265 289 310 476 597 - - -

Other Current Assets 128 274 93 163 342 342 342 342

Long-Term Assets 608 662 935 877 865 1,078 828 737

Gross PPE 17,083 19,444 21,359 22,154 22,528 24,628 26,584 27,847

Accumulated Depreciation 3,942 4,296 4,807 5,472 6,182 7,479 8,887 10,384

Net PP&E 13,142 15,148 16,552 16,681 16,346 17,149 17,697 17,463

Investments 2,407 2,644 2,966 3,659 4,131 4,131 4,131 4,131

Intangible 215 213 225 292 330 330 330 330

Deferred Assets - - - - - - - -

Total Assets 21,715 25,353 27,149 28,119 28,260 29,358 30,051 30,668

Current Liabilities 3,143 2,856 2,281 3,068 3,511 3,451 3,475 3,500

Short-term debt 2,253 1,622 1,009 1,795 1,819 1,819 1,819 1,819

Suppliers 415 876 877 502 581 531 548 565

Salaries and labor 102 130 126 141 165 177 183 188

Taxes 44 45 53 55 56 35 37 38

Provisions - - - - - - - -

Dividends 84 1 1 0 0 0 0 0

Other 245 182 217 575 889 889 889 889

Non-Current Liabilities 8,899 11,495 14,181 14,737 15,557 13,695 13,459 13,640

Long term debt 6,491 9,097 11,868 11,965 12,892 11,030 10,794 10,975

Other 182 224 216 769 1,123 1,123 1,123 1,123

Provisions 2,227 2,174 2,096 2,003 1,542 1,542 1,542 1,542

Total Liabilities 12,042 14,351 16,462 17,804 19,068 17,146 16,934 17,140

Minority Interest - - - - - - - -

Shareholders Equity 9,674 11,002 10,687 10,315 9,192 12,211 13,118 13,528

Total Liabilities and Equity 21,715 25,353 27,149 28,119 28,260 29,358 30,051 30,668


Klabin

Initiating With OverweightWe initiate coverage of Klabin with an Overweight recommendation and R$21 TP, supported by a real IRR of 9% that isabove inflation-adjusted bonds, the main reason for our bullish stance. The company has a strong business profile and wehighlight its solid competitive position, the foundation of its goodwill and its brand recognition – in fact, Klabin operates thebest and safest business model in the sector. The ramp-up of the Puma unit and the conclusion of investments should allowfor rapid deleveraging (4.5x net debt/EBITDA in 16E and 3.0x in 17E), strong FCF and rising ROIC in the years that follow. Thestock is currently trading at 11% FCF yield 2018E, which is inexpensive.

As one of the largest paper producers in the country, Klabin holds a significant competitive advantage when compared to itspeers, which is explained by its integrated model and energy surplus. The company enjoys pricing power thanks to its largescale, vast product portfolio, efficient distribution and brand reputation. Klabin’s solid earnings should improve in the nearterm, encouraged by the ramp-up of its Puma Project and the rebound of the Brazilian economy, driving the demand forvalue-added cardboard products. We welcome the company’s ability to sail through the domestic economic decelerationgiven its diversified product portfolio and its flexibility to arbitrate between the domestic and the export market.

Principle Summary Score

Business

The company has significant market share in cardboard and kraft paper, and its integrated model provides it substantialcost advantages. Moreover, Klabin’s brand is widely known in Brazil and it is the only manufacturer of liquid cardboards,a premium product line. Management is professional, providing business and product expertise, are shareholders andthe company adopts good standards of corporate governance to offset the influence of the controlling family and thedual classes of share in the units.

Strong

Financial

Historically low cash generation, large working capital, long cash conversion cycle and ROIC in line with company’s costof capital. The balance sheet is highly levered, but we anticipate solid FCF generation with the ramp-up of the pulp unit.The company has a long history of dividend payments and we expect it to continue following its unofficial payoutguidance of 20% of EBITDA.

Average

Growth

Klabin’s growth is clearer when compared to peers, and history evidences low dependence on macroeconomic factorsand the capacity to explore niches (liquid packaging), markets (export sales) and new products (hardwood pulp). Theramp-up of the Puma Project is Klabin’s short-term growth catalyst, and we expect it to boost the company’sconsolidated EBITDA in 2017. The company also plans to increase its cardboard capacity with a new machine.

Strong

Trading

Klabin’s units have not sold off as happened with Fibria and Suzano’s shares. We anticipate strong results in thefollowing quarters backed by the ramp-up of the pulp unit. Klabin is a broadly covered stock with high liquidity,but consensus estimates are in a downtrend recently. Forward consensus valuations are in line with historicalaverage. Definitely not out of favor.

Average

Valuation

Klabin’s units offer real IRR of 9%, above inflation-adjusted bonds and the main reason for our bullish stance. Thestock is currently trading at 11% FCF yield 2018E, which seems inexpensive. We believe Klabin operates the bestand safest business model in the sector, and accordingly such valuations offer sufficient margin of safety forrecommending the stock.

Overweight

KLBN11| Snapshot


Performance

Klabin is a leading integrated paper producer in Brazil,with 16 industrial units -- 15 in Brazil and one inArgentina. Founded in 1899 by the Klabin and Laferfamilies, the company produces paper and board forpackaging, corrugated board, industrial bags and wood.Klabin has a forestry base of approximately 450 thousandhectares, largely composed of pine and eucalyptus. Afterthe start-up of the Puma Project in March, the companyexpanded its pulp business and is now producinghardwood, softwood and fluff. Each unit is composed offour preferred shares and one common share, and tradesunder Bovespa’s Level 2 corporate governance standard.

Company Description

17

Klabin 5 Principles

Stock Rating: Overweight

YE 2017 Target Price: R$21.0/share


IRR (real): 9%



52-Week Range: R$14.8 - R$24.9

60

100

140

180

Jan

-15

Ap

r-1

5

Jul-

15

Oct

-15

Jan

-16

Ap

r-1

6

Jul-

16

Oct

-16

Klabin Ibovespa


Klabin – Business

Integration, Diversification and Brand EquityWe believe the company has a strong business profile. Klabin’s earnings have less volatility when compared to thepulp market, as over 70% of its sales are comprised of paper products. Also, Klabin’s largest end user in thecardboard and corrugated box segment is the food and beverage sector, which is resilient in economic recessions.The company dominates the cardboard market, in which it holds more than 30% market share in Brazil. Its pineforestry base makes Klabin the only softwood producer in the country, providing it with a monopoly in theproduction of coated cardboard for liquids, which requires the use of more resistant fibers. We also recall theagreement with Tetra Pak, which is the largest consumer of cardboard for liquids and accounts for ~20% of Klabin’sconsolidated revenues.

The production of kraftliner is adjusted between the conversion to industrial bags, corrugated boxes or exportsaccording to swings in demand. The integrated model (i.e. supplying its own pulp for the paper units) reduces thedependence on OCC, while the availability of virgin fiber enables the production of high-end products, i.e., rigidpapers with less weight. As a result, Klabin has superior profitability when compared to non-integrated players. Thehigh switching cost in the cardboard segment and Klabin’s vast product portfolio with substantial production scaleprovide it with reasonable pricing power.

In spite of the influence of the Klabin family in shareholder control and the dual classes of shares contained in theunits, we believe Klabin has good standards of corporate governance. The Board is composed of 13 members, fiveof whom are independent from controlling shareholders, and met 23 times in 2015. The company has an active fiscalcouncil and the top management is mostly professional, with diversified industry experience. Senior and mid-levelofficers have individual goals and are entitled to profit sharing based on the performance – revenues, EBITDA andROIC – of their department. The top management holds the stock, has 70% of the total compensation linked toconsolidated results, a significant improvement compared to 30% historically, and the company matches when theyuse bonuses to purchase stock. Historically, variable compensation represents only 0.8% of company’s EBITDA.Lastly, the company has important long-term investors and bondholders, such as Grupo Ligna, Temasek Holdings andthe Capital Group. We also recall that the stock units have 100% tag-along rights under Bovespa’s Nível 2 ofcorporate governance.

Klabin Products Markets Destination


Forestry Productivity

Food; 67%

Other Consumer

Goods; 13%

Bui lding;

8%

Others ; 12%

58

42 4035

0

10

20

30

40

50

60

70

Klabin Eldorado Fibria Suzano

MA

I p

er

Co

mp

an

y (

m3

/ha

/y)


Klabin produced an average score in our financial analysis. Excluding the expansion periodrelated to the Puma Project, the company generated modest cash flows. In the 2011-2016Eperiod, we calculated accumulated profits of R$4.1 billion, but the company burned R$5.7 billionin free cash flows. In addition, cash conversion cycle is long, usually exceeding 80 days, andworking capital exceeds 25% of revenues. On the positive side, we estimate that the ramp-up ofPuma and the reduction of capital expenditures (limited to maintenance and planting at around20% of EBITDA) should boost the generation of cash to as much as R$1.7 billion in 2017. Klabin’sreturn on invested capital has historically been lackluster – in the single digits and in line with itscost of capital – but we anticipate ROIC to improve following the start of Puma and the forecasteconomic rebound in Brazil.

Klabin is in a fast deleveraging mode after net debt-to-EBITDA peaked at 6.3x at the end of2015 (the company has no financial covenants). According to our estimates, the ratio should fallto 4.5x by year-end and 3.0x by the end of 2017. The debt schedule seems adjusted to Klabin’scash generation, as less than 20% is due in 18 months.

The company also has a long history of dividend payments. The bylaws set a minimum payout of25% of net income, but the company distributed R$2.0 billion since 2011, an effective ratio of70% of earnings. In our model, the non-cash effects of FX rate changes affect the bottom line andtherefore we prefer to estimate dividends based on the unofficial payout guidance of 20% ofEBITDA.

Klabin – Financial

Lackluster ROIC, Leveraged Balance Sheet

Source: Company Reports; Brasil Plural ResearchNote: 1. Cash ROIC = (EBIT - t - WK change) / (Total debt + Equity + Minority Interest) 19

Klabin Key Ratios

We Anticipate a Fast Deleverage Following Puma’s Ramp-up

Debt Maturity

35

8 57

5 93

2

2,2

87

2,2

49

2,2

66 2,7

44

2,0

96

1,5

10

77

0

2,1

39

20

0

3Q

16

4Q

16

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25/2

6

Local currency: R$ 5.6 bnAvg. tenor: 40 months

Foreign currency: R$ 12 bnAvg. tenor: 50 months

LocalCurrency5,168

ForeignCurrency12,024

Gro

ss D

eb

t

R$

17

,192

mn

KEY RATIOS 2011 2012 2013 2014 2015 2016E 2017E 2018E


FCF Yield 3.8% 2.4% 1.3% -15.9% -18.1% -3.5% 9.8% 11.3%



CROIC1 11% 19% 8% 9% 6% 5% 7% 8%

Working Capital/Sales 23% 25% 27% 29% 35% 23% 23% 23% 0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2014 2015 2016E 2017E 2018E 2019E

Mill

ion

s



Klabin’s earnings history demonstrates low dependence to macroeconomic factors and the capacity to explore niches, markets (export sales) and new products(hardwood pulp). The sluggish economic performance in Brazil since early 2014, which drastically affected the demand for paper, had nearly no impact on Klabin’s EBITDA –which increased 15% since 2013 – but had a slight negative effect on margins. Klabin’s earnings growth in the short term is coming almost exclusively from the start ofoperations at the Puma pulp mill. The pulp unit should fully ramp-up by the end of 2016, producing over 850ktons (selling about 550 ktons to Fibria in a commercialagreement) and boosting the company’s EBITDA by 19% vs. 2015. In the long run, we think Klabin will convert part of its hardwood production into raw material for its paperunits, particularly for a new cardboard machine.

The company’s next expansion project should be in the paper segment, through a new cardboard machine with total annual capacity of 450ktons and start-up likely bythe end of 2018. Based on Klabin’s historical margins in the segment, we calculated a real IRR of 9% for the project, equivalent to R$0.50 per unit, which we do not include inour price target calculation. We recall that Klabin should use part of Puma’s hardwood pulp to supply the new machine – it has a waiver clause with Fibria to anticipate thephase-out of the contract in the amount of 250ktons on the initiation of a new paper line. We expect Klabin to direct the output – value added liquid packaging boards andcup stock board – to the export market, especially to the US where it has nearly no exposure.

Klabin should gradually increase market share over time in the paper segment in Brazil, but not through acquisitions in the short term -- Klabin’s current balance sheet, theconclusion of Puma and the new cardboard machine should limit its appetite. In addition, potential targets in the cardboard segment are small (especially Papirus and Ibema),have limited funding and have controlling shareholder issues.

Klabin – Growth

Resilient and Low-Risk Growth

Source: Poyry; Brasil Plural Research

Klabin Has Exposure to Segments With High Growth PotentialNew Cardboard Machine’s Model

20

0%

1%

2%

3%

4%

-1%

-2%

-3%

-4%0% 20% 40% 60% 80% 100%

De

man

d g

row

th p

er

year

Share of consumption in 2014

Mar

ket

A

Mar

ket

B

Mar

ket

C Market DMarket E

Pu

lp

Kraftliner andrecycled paper

Coatedboards

Sack

kra

ft&

Ind

ust

rial

s b

ags

KLABIN MARKETS

Tissue

ContainerboardsCartonboards

Sack

pap

er

New Cardboard Machine (R$mn) 2017E 2018E 2019E 2020E 2021ENet Revenues - 298 1,414 1,496 1,584

Volume (th tons) - 100 450 450 450 Price 2,941 2,983 3,142 3,326 3,519

% Mg EBITDA 40% 40% 40% 40%(+) EBITDA Cardboard - 119 566 599 633

(-) EBITDA Pulp - 24 112 117 121 (=) EBITDA - 95 453 482 512 (-) Working Capital - (20) (50) (50) (50)(-) Capex (1,654) (1,117) (113) (120) (128)(=) FCFF (1,654) (1,042) 290 311 334

Debt 980 980 980 980 980 (-) Interest Expenses x (1-t) (37) (37) (37) (37) (37)(=) FCFE (1,691) (1,080) 252 274 297



Klabin is a popular and well-covered stock (KLBN11 is a unit made up of one common share and four PN shares) and has average daily volume of R$44mn. KLBN11 is coveredby 18 brokerage houses, but over the last six months consensus has sequentially lowered earnings estimates. However, the units have not sold off as happened with Fibriaand Suzano’s shares. The unit reached its historical peak of R$24.2 in November 2015, favored by a weaker BRL that encouraged export sales – and the company’s resilientoperating ratios last year. Lastly, forward consensus valuations are in line with the historical average.

Pulp and paper stocks in Brazil move in high correlation with news related to the supply-and-demand of pulp in the global market, the commodity price and FX rates. On onehand, the start-up of the OKI project in Asia should have negative impact on investor sentiment, raising fears of an oversupply in the market pulp. We expect earnings inearly 2017 to be encouraging, mostly through the ramp-up of the pulp unit and an eventual recovery of the domestic economy.

Lastly, we highlight that Klabin’s current financial situation is on the radar screen. The company’s high leverage amid high interest rates continue to limit cash flows and holdback new growth projects. Nonetheless, a fast ramp-up of Puma, buoyant economic leading indicators and updates on the cardboard project could improve sentiment.

Klabin – Trading

Definitely Not Out of Favor


2017E Consensus Evolution (R$ mn)Klabin EV/EBITDA 12 Months Forward

21

Short Interest (mn Shares)

4

5

6

7

8

9

10

11

12

Ap

r-1

1

Oct

-11

Ap

r-1

2

Oct

-12

Ap

r-1

3

Oct

-13

Ap

r-1

4

Oct

-14

Ap

r-1

5

Oct

-15

Ap

r-1

6

Oct

-16

EV/EBITDA Average

0

500

1,000

1,500

2,000

2,500

3,200

3,400

3,600

3,800

4,000

4,200

4,400

12M 6M 3M Current*

EBITDA (lhs) FCF (rhs)

0

10

20

30

40

50

60

Feb

-14

Jun

-14

Oct

-14

Feb

-15

Jun

-15

Oct

-15

Feb

-16

Jun

-16

Oct

-16


We initiate coverage of Klabin with an Overweight recommendation and R$21 TP,supported by a real IRR of 9%, above inflation-adjusted bonds and the mainreason for our bullish stance. The company’s strong track-record, Klabin’s flexibilityto supply both the domestic and the export market, high quality product mix andresilient operating results imply lower risk relatively to Suzano and Fibria, and assuch there is sufficient margin of safety in current valuations. Our long-termestimates rely on fragile assumptions such as pulp prices and FX rates, and thus wecenter all of our ratings on the 2018E FCF yield. The stock is currently trading at11% FCF yield 2018E, which is inexpensive.

Our target price and IRR calculation utilize a DCF calculation, incorporating FCFEestimates over the next five years. The company has a strong business profile andwe highlight its solid competitive position, the foundation of its goodwill and brandrecognition – in fact, Klabin operates the best and safest business model in thesector. Thus, we select a higher exit multiple (P/FCF) when calculating the terminalvalue, 14x, when compared to Suzano and Fibria’s models, at 13x and 12x,respectively.

We also calculate the net present value of adding a new cardboard machine, whichwe do not include in our model given the uncertainties related to the timing of thestart-up and investment schedules. According to our estimates, the new machinewould add R$0.5/unit, resulting in a 9% real IRR.

Klabin – Valuation

The Best Business Model at a Reasonable Price - Overweight

Source: Brasil Plural Reserach

2017E EBITDA Sensitivity to Pulp Prices and BRL Every R$0.1 variation in BRL impacts EBITDA in 3%, while a US$30/t change in pulp pricesmoves EBITDA by 2%


22

Avg. BRL 2017E

2.86 2.96 3.06 3.16 3.26

BH

KP

2017E

761 2,999 3,085 3,171 3,256 3,342

731 2,949 3,033 3,117 3,201 3,286

701 2,899 2,982 3,064 3,146 3,229

671 2,850 2,930 3,011 3,092 3,172

641 2,800 2,879 2,958 3,037 3,115

R$ million 2017E 2018E 2019E 2020E 2021E

EBITDA 3,064 3,291 3,490 3,750 4,045

(-) Change in Working Capital (201) (99) (105) (127) (123)

(-) Capital expenditures (726) (764) (804) (852) (1,700)

(-) Taxes - (138) (361) (441) (539)

(-) Net Financial Expenses (440) (318) (173) (98) 32

FREE CASH FLOW TO EQUITY 1,696 1,973 2,047 2,232 1,715

Equity Value 22,531

Shares Outstanding 1,079


Curr. Mkt Cap 2017E 2018E 2019E 2020E 2021E Perpetuity

(17,388) 1,696 1,973 2,047 2,232 1,715 24,246



Klabin



Cash flow statement (R$ million) 2011 2012 2013 2014 2015 2016E 2017E 2018E

EBITDA 1,077 1,352 1,707 1,715 1,967 2,347 3,064 3,291

(-) Change in working capital 135 (34) (208) (410) (370) (408) (201) (99)

(-) CAPEX (438) (654) (899) (2,945) (4,627) (2,415) (726) (764)

(-) Taxes (112) (120) (150) (11) (16) (15) - (138)

FREE CASH FLOW TO FIRM 662 544 449 (1,651) (3,046) (491) 2,136 2,291

(-) Net financial expenses (256) (295) (307) (393) (765) (125) (440) (318)

FREE CASH FLOW TO EQUITY 406 249 143 (2,044) (3,811) (616) 1,696 1,973

(+) Increase in debt 5,297 738 928 4,022 7,036 - - -

(+) Other - (517) (548) 1,119 (2,979) 330 (15) (16)

(+) Capital increase - - - - - - - -

(-) Dividends (207) (275) (301) (332) (378) (469) (613) (658)

CHANGE IN CASH POSITION 5,497 195 222 2,764 (133) (756) 1,068 1,299

Cash and equivalents 2,562 2,757 2,979 5,743 5,611 4,855 5,924 7,222

Income Statement (R$ million) 2011 2012 2013 2014 2015 2016E 2017E 2018ENet revenues 3,889 4,164 4,599 4,894 5,688 7,243 8,072 8,488 Cost of Services 2,557 1,937 2,871 2,650 3,445 4,828 5,375 5,571 Gross Profit 1,332 2,227 1,729 2,244 2,242 2,415 2,697 2,917 Gross Margin 34.3% 53.5% 37.6% 45.9% 39.4% 33.3% 33.4% 34.4%Total Operating Expenses 536 582 609 545 750 1,016 1,051 1,105

Sales expenses 321 345 363 380 429 559 605 637 G&A Expenses 249 274 281 298 338 497 484 509 Tax Expenses - - - - - - - -Other expenses (35) (10) (11) (85) 13 4 - -Amortization of intangibles 0 (26) (22) (49) (30) (44) (38) (41)

Operating Income 797 1,644 1,119 1,700 1,492 1,399 1,645 1,812 Operating Margin 20.5% 39.5% 24.3% 34.7% 26.2% 19.3% 20.4% 21.3%Depreciation and Amortization 280 (293) 587 15 475 948 1,419 1,479 EBITDA 1,077 1,352 1,707 1,715 1,967 2,347 3,064 3,291 EBITDA Margin 27.7% 32.5% 37.1% 35.0% 34.6% 32.4% 38.0% 38.8%Net Financial Income (501) (548) (739) (646) (3,440) 2,454 (119) (564)

Financial Income 346 311 276 628 975 1,033 718 674 Financial Expenses 847 858 1,015 1,274 4,415 (1,421) 837 1,237

Non-operational income - - - - - - - -Pre-Tax Income 296 1,096 380 1,054 (1,948) 3,853 1,527 1,248 Income Taxes (113) (344) (90) (323) 695 (433) (410) (508)Minority Interest - - - - - - - -Net Income 183 752 290 730 (1,253) 3,420 1,117 740 Net Margin 4.7% 18.1% 6.3% 14.9% -22.0% 47.2% 13.8% 8.7%EPS 0.21 0.85 0.33 0.68 (1.16) 3.17 1.04 0.69


Klabin




Current Assets 4,083 4,432 4,826 7,900 8,676 7,881 9,200 10,644

Cash and Eqiuv. 2,562 2,757 2,979 5,743 5,611 4,855 5,924 7,222

Accounts receivable 821 982 1,145 1,149 1,501 1,811 2,018 2,122

Inventories 506 474 496 564 701 1,076 1,120 1,161

Tax credits 101 135 120 332 737 13 13 13


Long-Term Assets 400 374 386 750 1,457 1,763 1,353 983

Gross PPE 8,244 7,364 8,108 10,795 14,770 17,185 17,911 18,675


Net PP&E 4,917 5,379 5,910 8,351 12,009 13,146 12,469 11,769

Investments 618 462 467 495 507 507 507 507

Intangible 2,723 3,450 3,331 3,678 3,619 3,619 3,619 3,619


Total Assets 12,742 14,098 14,919 21,174 26,268 26,916 27,148 27,522


Short-term debt 910 1,121 1,125 1,755 2,046 2,046 2,046 2,046

Suppliers 335 318 345 439 702 861 896 929


Taxes 97 111 62 55 45 72 75 77

Provisions 430 39 50 50 62 62 62 62

Dividends - - - - - - - -

Other 56 52 70 80 111 111 111 111


Long term debt 4,387 4,914 5,839 9,231 15,976 13,396 13,075 13,320

Other 263 130 199 201 397 397 397 397

Provisions 1,201 1,865 1,710 2,165 1,381 1,381 1,381 1,381


Minority Interest - - - - - - - -




Fibria

Growing in the Woods – Initiating with EW


Stock Performance

Fibria is the largest pulp producer in the world, with atotal capacity of 5.3 million tons of hardwood pulp,growing to 7.25 million tons after the ramp-up ofHorizonte 2 project. The company is the result of a mergerbetween Aracruz Celulose and VCP, two well-knownBrazilian pulp companies. Fibria owns nearly one millionhectares of forestry assets and four pulp mills in Brazil,with annual revenues close to US$3 billion, mostlygenerated through export sales. Fibria only issues votingshares, is jointly controlled by the BNDES and Votorantim,and has 41% of equity free float. The company’s financialstatements follow the IFRS standards and it trades as anADR on the NYSE.

Company Description

25

Stock Rating: Equal Weight

YE 2017 Target Price: R$24.0/share


IRR (real): 5%



52-Week Range: R$18.3 - R$58.3

FIBR3| Snapshot

Fibria has average scores across our Five Principles and we think the stock’s sell-off was deserved, as earnings andcash flows should take some time to rebound – it is too early for a bullish stance. Moreover, there is room foradditional consensus earnings downgrades in view of the higher debt ratios during 2017 and negative forces fromabroad, i.e, the appreciating BRL and lower pulp prices. The stock trades at only 7% FCF yield projected for 2018, whencapex starts to normalize, which is below the risk-free rate in the futures market. We are initiating coverage of Fibriawith an Equal Weight rating, R$24 target price and 5% implied IRR in real terms which does not seem a sufficientmargin of safety when considering risk-free inflation linked notes in Brazil, unpredictable earnings growth, low cash-adjusted ROIC, volatile cash flows and an average business profile. The stock plunged 48% since the peak achieved inSeptember 2015, a direct effect of lower global pulp prices and the BRL appreciation, which should not reverse anytimesoon according to our macroeconomics team.

Fibria 5 Principles

Principle Summary Score

BusinessFibria adopts firm risk management and internal controls, diversified production and intense R&D of newbusiness to circumvent weakness in the pulp market. It also has a concentrated customer base relative topeers. Corporate governance practices have room to improve.

Average

FinancialFibria has poor returns to shareholders, large working capital, and a high capex-to-EBITDA ratio. Fibria’sCROIC (cash adjusted ROIC) and ROE have been volatile and in single digits, in spite of a very low cost ofdebt. We estimate its financial profile to improve by 2019, with the ramp-up of the new pulp mill

Weak

Growth

Fibria’s earnings growth is unpredictable, like other pulp producers, but management has ambitious plansfor the company, evidenced by the commissioning of the H2 project, the acquisition of Macuco’s portterminal in Santos and the developments we have seen in logistics, genetic research of eucalyptus andprojects in non-pulp businesses.

Average

Trading

We think that Fibria’s stock will become out of favor sometime during 2017. Although the stock fell 57%since the peak achieved on September 2015, forward consensus valuations have bounced back and wesee room for downward revisions, as analysts revisit BRL and pulp prices estimates. The stock has a lot ofvisibility, covered by 17 brokerage houses and with average daily volume of R$60mn.

Average

Valuation

We set a R$24 price target (DCF-based with free cash flows to equity) and 5% inflation adjusted IRR, whichdoes not seem a sufficient margin of safety when taking into account risk-free, inflation-linked notes inBrazil, unpredictable growth, low ROIC and volatile cash flows. Fibria’s 2018 FCF yield of 7% is belowfuture interest rates, supporting our neutral stance.

Equal Weight

60

110

160

210

Jan

-15

Ap

r-1

5

Jul-

15

Oct

-15

Jan

-16

Ap

r-1

6

Jul-

16

Oct

-16

Fibria Ibovespa


Fibria follows well-established risk management and internal controls, diversified production and intense R&D to bridge the weakness of the pulp business, which ismarked by unpredictable commodity prices, dependence on FX rates, and a lack of bargaining power. Pulp producers compete to become large and to provide the marketpulp at the lowest possible cost to offset limited bargaining power and no switching costs with customers. Fibria has a concentrated customer base relatively to peers, withthe three largest customers accounting for 54% of sales, which implies a higher discount to list prices. Fibria’s competitive position results from operations at four sites, withsix cooking technologies and eight bleaching lines (we visited three last month in Aracruz, State of Espirito Santo), investing in fiber composites, new eucalyptus clones andnew products – such as TCF, Eucastrong and biofuel.

The large economies of scale increase the barriers for new players and so we see Fibria determined to compete by pursuing long-run cost superiority: i) a high-quality forestclose to the mills, ii) up-to-date facilities, and iii) efficient low-cost logistics. Fibria’s Horizonte 2 project is part of this strategy, adding economies of scale in the Tres Lagoassite as well as modern equipment, abundant forests and reliable railway-based logistics. Fibria’s core export regions are largely comprised of developed markets – Chinarepresents around 20% of net sales – and mostly to the tissue segment, which shows consistent growth.

Fibria – Business

Large Scale and Risk Management Offset Price Cycles

Source: Companies reports 2Q16 data; Brasil Plural Research

Fibria’s Core Markets

26

Europe, 36%

Asia, 33%

N. America, 21%

LatAm, 10%

Suzano Core Pulp Markets Eldorado Core Markets

Europe, 32%

Asia, 41%

N. America,

14%

LatAm, 13%

Europe, 30%

Asia, 46%

N. America, 10%

LatAm, 14%


Fibria’s differentiation strategy is based on the research and development of new applications for leftover eucalyptus pulp, what management calls “bio strategy” in itsnon-pulp business. As such, Fibria selected some initiatives, such as the lignin project (in an advanced stage after the acquisition of Lignol, Canada) and pilot projects onpyrolysis (through the JV with North American Ensysn), nanocellulose and biocomposites. Management targets at least 10% of sales priced at a premium, such as theEucastrong and the TCF (Total Chlorine Free) fibers, both supported by intellectual property rights secured by patents. Fibria does not plan to return to the paper business inBrazil since management fears the end of competitive barriers, particularly in the P&W segment. Management seems optimistic about the incremental value potential of thelignin, which is currently burned to generate power for the mill (as part of the black liquor in the recovery boiler).

Fibria’s corporate governance practices have room for improvement. BNDES and the Votorantim group hold 58% of the total capital and established common votes inprevious meetings. Since the merger of VCP and Aracruz in 2009, management adopted better internal controls, risk management policies and capital allocation guidelines.The Board of Directors is very active, meeting 17 times during 2015. The senior management is entitled to variable compensation attached to operating and financial targets,and includes stock options and deferred bonuses. In the last three years, variable compensation accounted for 0.8-1.0% of consolidated EBITDA. Management holds nearly nostock in the company and the history of share buybacks is negligible. We highlight that Fibria has relevant related-party issues: the BNDES accounts for 15% of the total debtand various subsidiaries of the Votorantim Group have business with Fibria, such as land transactions, the sale of wood and financial transactions with Banco Votorantim.

Fibria – Business

Innovation, Product Development and Genetics

Source: Company reports; Brasil Plural Research

Shareholder StructureClassifying the Forest Base by Categories

27

Votorantim, 29%

BNDESPar, 29%

Free Float, 41%

10%

20%

40%

20%

10%10%

36%33%

15%

6%

Diamond Gold Silver Bronze Lead

Current Effective Area Future Effective Area


Fibria scored poorly in our analysis of its financial principles, showing poor returns,enormous working capital and a high capex-to-EBITDA ratio over time. Weassessed six years of financial statements, coinciding with the company’s adoption ofIFRS reporting standards in 2010. Since then, Fibria’s CROIC (cash-adjusted ROIC) andROE have been volatile and in the single-digits in spite of a very attractive cost ofdebt (subsidized loans from BNDES and export guarantee notes result in 3-4% annualinterest cost in USD terms). Maintenance capex, including forestry planting,consume as much as 40% of the reported EBITDA, and we anticipate this should notchange going forward. We highlight very low effective income taxes, which benefitfrom tax losses in the past, amortization of goodwill related to the acquisition ofAracruz and federal tax credits.

The current expansion phase is adversely affecting the company’s financial ratios andbalance sheet. For instance, net debt to EBITDA should continue to rise and exceed5.0x in 2017, hurt also by the strong BRL and lower pulp prices. Fortunately, thecompany has inactive financial covenants with creditors – they allow net debt-to-EBITDA to surge to any level during the construction of H2 provided the companymaintains its investment grade credit rating. Nonetheless, the current 4.5x net debt-to-EBITDA restrictive covenant would be effective upon a downgrade. Managementplans to maintain the investment grade rating with the leading rating agencies andis following their criteria – in fact, Fibria adopted a new dividend policy, a minimumcash policy and increased long-term debt vs. short-term maturities. We estimateFibria’s financial profile should improve by 2019, with the ramp-up of the new pulpmill and its incremental cash generation.

The company utilizes derivatives for hedging both FX and interest rate risk, innotional amounts of US$1.85 billion and US$619mn, respectively. Management builta strong organizational structure of internal controls and risk management, andadopted various risk policies to address FX rate, market conditions, interest ratesand pulp prices, with management establishing independent committees, approvalsand reporting lines. In our view, CROIC and ROE should continue below the cost ofequity until 2019, as the increase in the asset base and financial expenses shouldpartly offset the increase in EBITDA.

Fibria – Financial

Poor Returns and Increasing Debt Ratios

Source: Company Reports; Brasil Plural ResearchNote: 1. Cash ROIC = (EBIT - t - WK change) / (Total debt + Equity + Minority Interest)

Fibria Key Ratios

Leverage Should Exceed 5.0x ND/EBITDA in 2017

28

KEY RATIOS 2011 2012 2013 2014 2015 2016E 2017E 2018E


FCF Yield -17% 8.7% 4.7% 1.6% 8.2% -30% -25% 6.7%



CROIC1 1% 4% 8% 8% 14% 4% 1% 4%

Working Capital/Sales 32% 25% 16% 16% 14% 19% 21% 19%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2013 2014 2015 2016 2017 2018 2019 2020



Fibria’s earnings growth has the same lack of predictability as other pulp producers,who all follow the cycle of pulp prices and FX rates. Nonetheless, management hasambitious plans for the company, as evidenced by the commissioning of the H2project, the acquisition of Macuco’s port terminal in Santos and the developmentsin logistics, eucalyptus genetics and projects in non-pulp business.

Management has not provided guidance on potential results and estimated costs ofthe new developments. Thus, we estimate Fibria’s earnings to continue following thechanges in pulp prices and the BRL/USD, and conservatively have not included theirpotential NPV in our model. Nonetheless, we acknowledge these initiatives areupside risks to valuations.

In the short term, cash flows should continue suffering from an above-averagediscount to BEKP list prices (29% vs. 23% as usual), the capex associated with theconstruction of Horizonte 2 and the stronger BRL (our macroeconomic teamforecasts a 2017 year end FX rate of R$3.0/USD). Looking forward, earnings growthshould come from the start-up of Horizonte 2 in late 2017 (in our model, H2 willincrease EBITDA by circa 45% in 2018), adding 1.95 million tons of annual capacityand lowering consolidated cash costs through shorter forest-mill distance and thesale of energy surplus.

In addition, management may close opportunistic deals, like the purchase of third-party wood. Fibria is taking advantage of the very low prices of wood in Brazil andsigned a five-year purchase agreement for deliveries of FSC certified eucalyptusplanned for 2018-2022, locking-in attractive prices and lowering cash-costs in thefuture. Such strategy preserves its forestry reserves, guarantees wood supply ifdrought or pests affect specific regions during the growing cycle, and increases thepossibilities of new fiber mix. We are following management’s guidance that third-party wood should account for 33% of Fibria’s consolidated wood requirements in2017 and fall to 28% in 2020.

Fibria – Growth

Growing Earnings in a Cyclical Industry

Source: Company Reports; Brasil Plural Research

Fibria’s Growth Initiatives

Pulp Volumes and Fibria’s Discount to List Prices (FOEX Europe)

29

Identification of promising

technologies

Identification of potential

technological partners

Negotiation withs elected technological

partners

Agreements with partners

in product application

Pilot investments

Commercial Investments

PYROLISIS

LIGNIN Ongoingnegotiations

Several partners already

collaborating-

NANOCELLULOSESeveral partners

already collaborating

-

BIOCOMPOSITESOngoing

investigation- - - -

20%

22%

24%

26%

28%

30%

0

2,000

4,000

6,000

8,000

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Th. T

on

ne

s

Pulp Volumes (LHS) Discount (RHS)


We think that Fibria’s stock will become out of favor sometime during 2017. Although the stock fell 57% since the peak achieved on September 2015, forward consensusvaluations have bounced back and we see room for downward revisions, as analysts revisit BRL and pulp prices estimates. Investors seem pessimistic about the outlook forBrazilian exporters, which we agree is bleak considering the currency mismatch – costs and operating expenses in BRL, revenues in hard currency and the stronger BRLestimated by our economic analysts. There are no immediate catalysts and the stock should trade range bound as Fibria’s Horizonte 2 project starts amid falling pulpprices. The project has been consuming billions in cash, deteriorating the balance sheet and pressuring debt covenants, with start-up planned for late 2017. Further newsrelated to the start-up of APP’s OKI project and price hikes should drive the stock in the near term.

The stock has a lot of visibility, covered by 17 brokerage houses and with average daily volume of R$60mn. Fibria’s results in the first half of 2016 showed 11% higherrevenues and flat growth in EBITDA, a direct effect of the slowdown in pulp prices and the appreciation of the BRL. The number of buy ratings on the Street have fallen from64%to 47%, the lowest point in six months.

Fibria – Trading

Average


2017E Consensus Evolution (R$mn)Fibria EV/EBITDA 12 Months Forward

30

Short Interest (mn Shares)

4

5

6

7

8

9

10

Ap

r-1

1

Oct

-11

Ap

r-1

2

Oct

-12

Ap

r-1

3

Oct

-13

Ap

r-1

4

Oct

-14

Ap

r-1

5

Oct

-15

Ap

r-1

6

Oct

-16

EV/EBITDA AVERAGE

-1,200

-1,000

-800

-600

-400

-200

0

200

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

6,000

12M 6M 3M Current*EBITDA (lhs) FCF (rhs)

0

2

4

6

8

10

12

14

16

18

20

Oct

-13

Feb

-14

Jun

-14

Oct

-14

Feb

-15

Jun

-15

Oct

-15

Feb

-16

Jun

-16

Oct

-16


Our low-conviction estimates result in a fair value per share of R$24 (DCF basedon free cash flows-to-equity) and only 5% inflation-adjusted IRR, which seemsto provide no margin of safety when taking into account risk-free, inflation-linkednotes in Brazil, unpredictable growth, low ROIC and volatile cash flows. Thus, weset an Equal Weight rating for FIBR3. We assume a long-term average BEKP price(FOEX Europe) of US$701 in building our DCF and IRR models and continuingappreciation of the BRL as determined by our macroeconomic team. Fibria’s 2018FCF yield of 7% is below future interest rates, supporting our neutral stance onthe stock.

We have low conviction in the DCF and IRR methods due to the veryunpredictable nature of two key input variables -- global pulp prices and the FXrate -- and we select a low exit multiple (P/FCF) when calculating the terminalvalue, 12.0x. We prefer to utilize short-term, high-conviction valuation metrics,such as trading multiples (FCF yields or P/CF). In all three pulp and paper stocksthat we are initiating coverage on, we pick 2018 FCF yield as near-term cash flowsare impacted by their expansion projects: in the case of Fibria, the Horizonte 2project should become fully operational in 2018.

We ran a sensitivity analysis and for every US$30 increase in our long-term HWprice assumption of US$701/ton, Fibria’s fair value per share increases by R$4.0per share. Coeteris paribus, for every 20 cents in BRL depreciation in each year ofour forecasting period, our target price increases by R$6 per share. The stock’scurrent price of R$23 makes it fairly valued, consistent with volatile CROIC, ROEand FCFs.

Fibria – Valuation

Valuation Based on FCF Yield, Low Conviction DCF Model

Source: Brasil Plural Reserach

2017E EBITDA Sensitivity to Pulp Prices and BRL Every R$0.1 variation in BRL impacts EBITDA in 6.7%, while a US$30/t change in pulp pricesmoves EBITDA by 10%


31

Avg. BRL 2017E

2.86 2.96 3.06 3.16 3.26

BH

KP

20

17

E

761 3,242 3,467 3,692 3,917 4,142

731 2,963 3,178 3,394 3,609 3,824

701 2,684 2,890 3,095 3,301 3,506

671 2,405 2,601 2,797 2,993 3,189

641 2,127 2,313 2,499 2,685 2,871

R$ million 2017E 2018E 2019E 2020E 2021E

EBITDA 3,095 4,455 5,424 5,937 6,220

(-) Capital expenditures (5,476) (2,500) (2,300) (2,404) (3,800)

(-) Change in Working Capital (93) (280) (142) (20) (20)

(-) Taxes - - - - (278)

(-) Net Financial Expenses (649) (838) (806) (717) (591)

(=) Free Cash Flow to Equity (3,123) 837 2,176 2,796 1,530

Equity Value 13,114

Shares Outstanding (Mn) 553.2


Curr. Mkt Cap 2017E 2018E 2019E 2020E 2021E Pepetuity

(12,553) (3,123) 837 2,176 2,796 1,530 18,274

Implied IRR, real = 5%


Fibria


Source: Company reports; Brasil Plural Research 32

Income Statement (R$ million) 2011 2012 2013 2014 2015 2016E 2017E 2018ENet revenues 5,854 6,174 6,917 7,084 10,081 9,851 9,696 11,917 Cost of Services 5,124 5,237 5,383 5,546 5,878 7,097 8,147 9,278 Gross Profit 730 937 1,535 1,538 4,202 2,754 1,549 2,639 Gross Margin 12.5% 15.2% 22.2% 21.7% 41.7% 28.0% 16.0% 22.1%Total Operating Expenses 352 231 (176) (119) 678 1,206 1,102 1,212

Sales expenses 295 298 348 365 437 441 374 474 G&A Expenses 310 286 300 265 266 271 285 298 Tax Expenses - - - - - - - -Other expenses (253) (354) (823) (749) (24) 468 418 414 Amortization of intangibles 0 1 - 1 (0) 26 26 26

Operating Income 378 706 1,710 1,657 3,524 1,548 447 1,427 Operating Margin 6.5% 11.4% 24.7% 23.4% 35.0% 15.7% 4.6% 12.0%Depreciation and Amortization 1,884 1,506 1,064 1,134 1,813 2,082 2,649 3,028 EBITDA 2,262 2,213 2,775 2,791 5,338 3,630 3,095 4,455 EBITDA Margin 38.6% 35.8% 40.1% 39.4% 52.9% 36.8% 31.9% 37.4%Net Financial Income (1,869) (1,696) (2,054) (1,635) (3,685) 2,374 (230) (1,166)

Financial Income 217 168 111 134 222 285 95 27 Financial Expenses 2,086 1,864 2,165 1,769 3,907 (2,089) 325 1,193

Non-operational income 241 - - - - - - -Pre-Tax Income (1,250) (990) (344) 22 (161) 3,922 217 261 Income Taxes 382 292 (354) 141 518 (1,333) (74) (89)Minority Interest (5) (7) (9) (7) (15) 12 1 1 Net Income (873) (705) (706) 156 342 2,600 144 173 Net Margin -14.9% -11.4% -10.2% 2.2% 3.4% 26.4% 1.5% 1.5%EPS (1.87) (1.27) (1.28) 0.28 0.62 4.70 0.26 0.31

Cash flow statement (R$ million) 2011 2012 2013 2014 2015 2016E 2017E 2018EEBITDA 2,262 2,213 2,775 2,791 5,338 3,630 3,095 4,455 (-) Change in working capital (178) 236 289 (136) (504) (538) (93) (280)(-) CAPEX (2,899) (1,119) (1,287) (1,625) (2,389) (6,461) (5,476) (2,500)(-) Taxes (4) (15) (423) (29) (76) - - -FREE CASH FLOW TO FIRM (820) 1,315 1,354 1,001 2,369 (3,369) (2,474) 1,675 (-) Net financial expenses (731) (520) (694) (776) (298) (450) (649) (838)FREE CASH FLOW TO EQUITY (1,551) 796 660 225 2,071 (3,819) (3,123) 837 (+) Increase in debt (409) (528) (755) (1,396) 4,937 3,000 2,500 -(+) Other 2,243 (389) (857) (18) (3,518) - - -(+) Capital increase - 1,344 - - - - - -(-) Dividends (264) - - - (2,148) (650) (36) (87)CHANGE IN CASH POSITION 19 1,223 (952) (1,189) 1,343 (1,469) (659) 751 Cash and equivalents 2,091 3,314 2,362 1,173 2,516 1,047 388 1,139


Fibria


Source: Company reports; Brasil Plural Research 33


Current Assets 5,296 6,246 4,904 3,261 5,461 4,231 3,828 5,034

Cash and Eqiuv. 2,091 3,314 2,362 1,173 2,516 1,047 388 1,139

Accounts receivable 945 755 382 538 742 739 727 894

Inventories 1,179 1,183 1,266 1,239 1,571 1,814 2,082 2,371

Tax credits 328 209 201 163 462 462 462 462


Long-Term Assets 2,711 2,641 3,014 4,740 5,782 4,448 4,375 4,286

Gross PPE 18,249 18,331 18,461 17,527 18,407 24,868 30,344 32,844


Net PP&E 11,841 11,175 10,727 9,253 9,433 13,839 16,692 16,191

Investments 3,272 3,366 3,470 3,788 4,253 4,253 4,253 4,253

Intangible 4,809 4,717 4,634 4,552 4,506 4,479 4,453 4,427


Total Assets 27,929 28,145 26,750 25,594 29,434 31,250 33,601 34,191


Short-term debt 1,256 1,192 3,079 1,151 1,376 1,376 1,376 1,376

Suppliers 374 436 587 593 668 789 905 1,031


Taxes 53 41 56 56 564 118 136 155

Provisions - 470 470 - - - - -

Dividends 2 2 2 39 86 86 86 86

Other 142 205 125 125 90 90 90 90


Long term debt 10,358 9,894 7,252 7,784 12,497 12,673 14,754 15,082

Other 969 500 430 474 524 524 524 524

Provisions 102 105 129 622 642 642 642 642


Minority Interest 29 37 46 52 63 51 51 50




Macroeconomics Assumptions

Source: Brasil Plural ResearchNote 1: Europe Reference 34

2014 2015 2016E 2017E 2018E 2019E 2020E 2021E

GDP 0.1% -3.8% -3.1% 1.5% 2.1% 2.5% 3.0% 3.0%

IPCA 6.4% 10.7% 6.9% 5.1% 4.5% 4.5% 4.5% 4.5%

BRL/USD (avg) 2.36 3.33 3.46 3.06 3.04 3.13 3.24 3.35

BRL/USD (eop) 2.66 3.96 3.10 3.00 3.08 3.18 3.29 3.41

TJLP 5.0% 7.0% 7.5% 7.5% 7.0% 7.0% 7.0% 7.0%

SELIC (avg) 11.0% 13.6% 14.2% 11.4% 8.8% 8.5% 8.0% 8.0%

BHKP (US$/t)1 745 784 707 701 701 701 701 701


Appendix

Global Trading Comps (as of October 20th)

35Source: Bloomberg, Brasil Plural Research; | Note: * Ratings and target prices for the companies in the unshaded area are consensus data provided for informational, comparative purposes only and should not be construed as a rating recommendation determined by Brasil Plural or the analyst team.

Company Ticker Rating* Price FXReal

12M TP* UpsideMkt Cap (US$mn)

EV/EBITDA P/E FCF Yield %IRR 16E 17E 16E 17E 16E 17E

Suzano SUZB 5 BZ OW 10.1 BRL 12% 15.0 49% 3,543 5.1 6.1 3.3 10.0 10.9% 5.9%Klabin KLBN11 BZ OW 16.1 BRL 9% 21.0 30% 5,584 11.9 8.7 5.1 15.6 -3.5% 9.8%Fibria FIBR3 BZ EW 22.7 BRL 5% 24.0 6% 3,982 7.0 9.1 4.8 n.m -30.3% -24.9%CMPC CMPC CI EW 1,367 CLP 1,605 17% 5,124 8.1 7.8 21.1 18.2 4.0% 3.7%Empresas COPEC COPEC CI EW 6,262 CLP 6,813 9% 12,208 9.1 8.6 19.9 19.2 4.0% 6.2%LatAm Average 5,354 8.2 8.0 10.8 15.8 -3.0% 0.1%

Stora Enso STERV FH OW 8.1 EUR 8.7 8% 7,179 6.8 6.7 12.2 10.8 6.7% 7.3%UPM-Kymmeme UPM1V FH EW 19.2 EUR 19.1 0% 11,210 7.3 7.5 13.0 13.3 9.9% 9.3%Smurfit Kappa SKG ID OW 20.4 EUR 26.5 30% 5,281 5.8 5.7 10.0 9.3 8.9% 11.2%Holmen AB HOLMB SS EW 312 SEK 295 -5% 2,981 10.1 9.8 17.1 16.7 6.0% 6.7%Svenska Cellulosa SCAB SS OW 256 SEK 295 15% 20,374 11.0 10.1 19.9 18.2 1.4% 4.0%Metsa Board METSB FH OW 5.1 EUR 5.7 12% 2,021 9.0 7.0 17.9 12.0 0.6% 9.3%Europe Average 6,230 8.3 7.8 15.0 13.4 5.6% 8.0%

Graphic Packaging GPK US OW 13.4 USD 15.8 19% 4,267 7.8 7.5 17.0 15.4 8.6% 10.0%International Paper IP US EW 47.2 USD 50.5 7% 19,401 7.6 6.9 13.5 12.2 5.2% 8.0%WestRock WRK US OW 46.9 USD 53.1 13% 11,798 7.3 7.0 18.4 15.9 8.6% 9.4%

Packaging Corp. of America PKG US OW 81.1 USD 85.7 6% 7,645 8.4 7.8 16.8 15.3 7.4% 7.9%Sonoco Products SON US EW 51.1 USD 50.3 -1% 5,117 9.2 8.9 18.8 17.6 5.7% 6.0%Resolute Forest RFP US EW 4.7 USD 5.1 9% 416 3.9 4.0 n.m n.m -32.7% -13.8%Domtar UFS US EW 37.1 USD 41.1 11% 2,322 4.9 4.7 12.4 11.5 7.4% 12.6%Potlatch Corp PCH US OW 39.4 USD 40.7 3% 1,594 17.6 15.3 n.m 26.2 5.0% 6.0%Bemis Co BMS US EW 50.5 USD 52.4 4% 4,779 10.2 9.6 18.6 16.7 5.4% 5.6%Weyerhaeuser WY US OW 31.5 USD 35.7 13% 23,585 18.0 15.2 n.m 24.9 6.5% 5.8%Rayonier RYN US OW 26.1 USD 27.2 4% 3,204 17.1 17.7 n.m n.m 2.6% 4.5%North America Average 4,779 10.2 9.5 16.5 17.3 2.7% 5.6%

Mondi PLC MNDI LN OW 1,621 GBp 1,773 9% 9,656 7.1 6.9 13.0 12.4 7.5% 8.6%Sappi Ltd SAP SJ OW 7,714 ZAr 7,730 0% 3,001 5.6 5.6 9.7 9.3 10.5% 9.8%South Africa Average 6,329 6.3 6.2 11.4 10.8 9.0% 9.2%

Oji Holdings 3861 JT OW 420 JPY 473 13% 4,099 7.4 7.4 16.7 11.2 15.6% 12.4%

Shandong Sun Paper 002078 CH OW 7.0 CNY 8.0 14% 2,646 9.3 6.7 17.4 12.3 n.m. n.m.Lee & Man Paper 2314 HK OW 6.1 HKD 7.3 21% 3,553 8.6 7.7 9.6 8.5 0.0% 6.3%Nine Dragons Paper 2689 HK OW 6.7 HKD 8.3 23% 4,050 8.7 7.7 12.8 10.9 7.3% 6.4%Asia Average 3,802 8.5 7.4 14.1 10.7 7.6% 8.4%


Whenever you purchase a large

amount of future earnings power for

a low price, you have made a good

investment. The only way to

accomplish this is to buy when

others are selling. Investors often

struggle with this concept; it is not

easy to act contrary to popular

opinion

Appendix: Investment Methodology

We grouped important factors widely used by the legends of stock investing (Ben Graham, Warren Buffett and SethKlarman, among others) into five main investment principles that have proved timeless: Business (earnings visibility,low volatility in business, competitive advantages, and corporate governance); Financial (CROIC, solid free cash flows,and dividends/share buybacks); Growth (insulation from macroeconomics, structural demand/new markets, andconsolidation opportunities); Trading (news flow, short-term results, and “out of favor” status); and Valuation (FCFmultiples, implied IRR, DCF target price and trading comps – which frame the margin of safety requirement). Eachstock is scored differently on each principle. In general, we require a high margin of safety for an Overweightrecommendation if the company has weak scores in Business, Financial or Growth principles.

36

(John Templeton)

Business

Financial Growth

Trading

Valuation

MARGIN OF SAFETY

DisclosureGENERAL DISCLAIMER

This report has been produced by the research department (“Brasil Plural Research”) of Brasil Plural Corretora de Câmbio, Títulose Valores Mobiliários S.A. (“BRASIL PLURAL CCTVM”). BRASIL PLURAL is a brand name of BRASIL PLURAL CCTVM.

This report may not be reproduced, retransmitted, displayed or re-published to any other person, in whole or in part, for anypurpose, without the prior written consent of BRASIL PLURAL CCTVM, which consent may be sought by contacting the principalanalyst, who is going to be responsible for obtaining the Control Room´s approval. BRASIL PLURAL CCTVM accepts no liabilitywhatsoever for the actions of third parties in this respect.

This research report is for distribution only under such circumstances as may be permitted by applicable law. This research report isnot tailored to the specific investment objectives, financial situation or particular needs of any specific recipient, even if sent only toa single recipient. This research report is not guaranteed to be acomplete statement or summary of any securities, markets, reportsor developments referred to in this research report. Neither BRASIL PLURAL CCTVM nor any of its directors, officers, employeesor agents shall have any liability, however arising, for any error, inaccuracy or incompleteness of fact or opinion contained in thisresearch report or lack of care in this research report’s preparation or publication, or any losses or damages which may arise fromthe use of this research report.

BRASIL PLURAL CCTVM may rely on information barriers, such as “Chinese Walls” to control the flow of information within theareas, units, divisions, groups, or affiliates of BRASIL PLURAL CCTVM.

Investing in any of the non-U.S. securities or related financial instruments (including ADRs) discussed in this research report maypresent certain risks. Non-US securities mentioned, recommended, offered, or sold by Brasil Plural CCTVM or its affiliates are notinsured by the Federal Deposit Insurance Corporation and are subject to investment risks, including the possible loss of the entireprincipal amount invested. The securities of non-U.S. issuers may not be registered with, or be subject to the regulations of, theU.S. Securities and Exchange Commission. Information on such non-U.S. securities or related financial instruments may be limited.Foreign companies may not be subject to audit and reporting standards and regulatory requirements comparable to those in effectwithin the United States.

The value of any investment or income from any securities or related financial instruments discussed in this research reportdenominated in a currency other than U.S. dollars is subject to exchange rate fluctuations that may have a positive or adverseeffect on the value of or income from such securities or related financial instruments.

Past performance is not a guarantee of future results and no representation or warranty, express or implied, is made regardingfuture performance of any security mentioned in this report. Income from investments may fluctuate. The price or value of theinvestments to which this research report relates, either directly or indirectly, may fall or rise against the interest of investors.Any recommendation or opinion contained in this research report may become outdated as a consequence of changes in theenvironment in which the issuer of the securities under analysis operates, in addition to changes in the estimates and forecasts,assumptions and valuation methodology used herein.

The locally listed shares of Brazilian companies may only be purchased by investors outside of Brazil who are “eligible investors”within the meaning of applicable laws and regulations.

STOCK RATINGSRatings

(i)Definition

(ii)Coverage

(iii)Banking Relationship

(iv)

OverweightOverweight stocks are expected to have a total return ofat least 15% and are the most attractive stocks within theindustry.

37.68 3.85

Equal WeightEqual weight stocks are expected to remain flat or increase invalue and are less attractive than Overweight stocks.

39.13 11.11

UnderweightUnderweight stocks are the least attractive stocks within theindustry.

23.19 12.50

(i) For disclosure purpose only, in accordance with FINRA requirements, we include the category headings of BUY, HOLD and SELLalongside our ratings of Overweight, Equal Weight and Underweight, respectively. Overweight, Equal Weight and Underweightare not the equivalent of BUY, HOLD and SELL but represent recommended relative weighting.

(ii) Investment ratings reflect the analyst’s assessment of a stock’s absolute total return and its attractiveness relative to otherstocks within the industry. The Industry is comprised of stocks covered by a single analyst or two or more analysts sharing acommon segment, geographic region or other classification(s). The industries we cover are: 1) Banking and Financial Services;2) Basic Materials (Steel & Mining and Pulp & Paper); 3) Consumer Goods, Retail and Food & Beverage; 4) Healthcare and

Pulp and Paper | Sowing the Seeds of Value

October 21, 2016

Sowing the Seeds of Value Brasil Plural Equity Research | 38

Education; 5) Oil & Gas and Petrochemicals; 6) Real Estate; 7) Telecommunications, Media and Technology; 8) Transportation,Industrials and Logistics; 9) Utilities; and 10) Equity Strategy.

(iii) Percentage of companies covered by BRASIL PLURAL CCTVM within this rating category.(iv) Percentage of companies within this rating category for which BRASIL PLURAL CCTVM provided investment banking services

over the last 12 (twelve) months, or which maybe provided during the next 3 (three) months.

ANALYST(S) DISCLOSURES AND CERTIFICATION

The analysts hereby certify that the views expressed in this research report accurately reflect their personal views about the subjectsecurities or issuers and it was prepared in an independent manner, including with respect to the person and to BRASIL PLURAL.

The analyst’s compensation is, directly or indirectly, determined by income from BRASIL PLURAL´s business and financialoperations.

In addition, the analysts certify that no part of their compensation was, is, or will be directly or indirectly related to the specificrecommendations or views expressed in this research report.

The compensation of the analyst who prepared this report is determined by research management and senior management (notincluding investment banking). Analyst compensation is not based on investment banking revenues, however, compensation mayderive from the business and financial operations revenues of BRASIL PLURAL CCTVM, its affiliates and/or subsidiaries as a whole,of which investment banking, sales and trading are a part. Compensation paid to analysts is the sole responsibility of BRASIL PLURALCCTVM.

The principal analyst Bernardo Carneiro, CFA is responsible for the content of this report and for meeting the requirements ofSecurities and Exchange Commission of Brazil (CVM) Instruction 483/2010.Unless otherwise stated, the individuals listed on the cover page of this report are research analysts.

COMPANY SPECIFIC DISCLAIMERSCompanies Mentioned Ticker Recent Price Rating

Fibria FIBR3 R$22.68 Equal WeightKlabin KLBN11 R$16.12 OverweightSuzano SUZB5 R$10.09 Overweight

Within the past 12 months, BRASIL PLURAL, its affiliates and/or subsidiaries have received compensation for investment bankingservices from Fibria.BRASIL PLURAL or its affiliates and/or subsidiaries were acting as market makers for the following company analyzed in this reportat the time this report was issued: Fibria.BRASIL PLURAL or its affiliates and/or subsidiaries expect to receive or intends to seek compensation for investment bankingservices and/or products from Fibria within the next 3 (three) months.The subject company Fibria is currently (or was within the past 12 months) a client of the firm.BRASIL PLURAL and/or its affiliates may have interests, or long or short positions, and may at any time make purchases or sales asa principal or agent of the following securities referred to herein: FIBR3, KLBN11 and SUZB5.At the time of publication, BRASIL PLURAL, its affiliates or subsidiaries, makes a market in the following subject security: FIBR3.


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FIBR3 Target Price

Rating and Price Target History for FIBR3 as of 10/20/2016UW: $2810/29/13

UW: $2911/18/13

UW: $2701/23/14

UW: $24.506/04/14

UW: $2709/23/14

UW: $2911/25/14

Created By BlueMatrix

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KLBN11 Target Price

Rating and Price Target History for KLBN11 as of 10/20/2016OW: $1501/23/14

OW: $15.509/23/14

OW: $1602/12/15



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SUZB5 Target Price

Rating and Price Target History for SUZB5 as of 10/20/2016EW: $1010/29/13

OW: $1005/12/14

OW: $1109/23/14

OW: $1212/01/14


For important disclosures and price charts regarding companies mentioned in this research report, please visit Brasil Plural’sdisclosure website: https://brasilplural.bluematrix.com/sellside/Disclosures.action. For written information, please contact: ChiefCompliance Officer, Brasil Plural Securities LLC, 545 Madison Avenue, 8th Floor, New York, NY 10022; Phone: 212-388-5600.

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Prices in this report are believed to be reliable as of the date on which this report was issued and are derived from one or moreof the following: (i) sources as expressly specified alongside the relevant data; (ii) the quoted price on the main regulated market


October 21, 2016


https://brasilplural.bluematrix.com/sellside/Disclosures.action?

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THE DISTRIBUTION OF THIS DOCUMENT IN OTHER JURISDICTIONS MAY BE RESTRICTED BY LAW AND PERSONS INTO WHOSEPOSSESSION THIS DOCUMENT COMES SHOULD INFORM THEMSELVES ABOUT, AND OBSERVE, ANYSUCH RESTRICTIONS. ANYFAILURE TO COMPLY WITH THESE RESTRICTIONS MAY CONSTITUTE A VIOLATION OF THE LAWS OF ANY SUCH OTHER JURISDICTION.


October 21, 2016


This document does not constitute or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribefor, any securities nor shall it or any part of it form the basis of, or be relied on in connection with, or act as an inducement toenter into, any contract or commitment whatsoever.

While the information in this document and the opinions are based on sources believed to be reliable, BRASIL PLURAL has notindependently verified the accuracy of such sources. Accordingly no representation or warranty, express or implied, is made as to,and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions containedin this document, and neither BRASIL PLURAL nor any of its affiliates, directors, members, officers or employees shall have anyliability whatsoever for any loss howsoever arising from any use of this document or its contents or otherwise arising in connectiontherewith.

Any opinions, forecasts or estimates in this document constitute a judgment as at the date of this report. There can be noassurance that future results or events will be consistent with any such opinions, forecasts or estimates. This information is subjectto change without notice and its accuracy is not guaranteed. It may be incomplete or condensed and it may not contain allmaterial information concerning the company. BRASIL PLURAL shall have no obligation to update the information contained inthis document.

BRASIL PLURAL (or its affiliates, officers, directors or employees) may, to the extent permitted by law, have acted upon or used theinformation herein contained before the publication of this report and may have a position in securities issued by the companiesand may make a market or act as a principal in any transactions in any such securities. BRASIL PLURAL may from time to timeperform investment banking or other services to, or solicit investment banking or other business from, the companies.

THIS DOCUMENT HAS BEEN FORWARDED TO YOU SOLELY FOR YOUR INFORMATION AND MAY NOT BE REPRODUCED ORREDISTRIBUTED TO ANY OTHER PERSON. BY ACCEPTING THIS DOCUMENT YOU AGREE TO BE BOUND BY THE FOREGOINGLIMITATIONS.

This document is exempt from the general restriction in section 21 of the Financial Services and Markets Act 2000 (“FSMA”) onthe communication of invitations or inducements to engage in investment activity on the grounds that it is made to a certifiedsophisticated investor, being a person who (a) has a current certificate signedby an authorized person to the effect that he issufficiently knowledgeable to understand the risks associated with the investment type or (b) has signed a statement in the formprescribed in article 50 of the FSMA 2000 (Financial Promotion) Order 2005.

The content of this document has not been approved by an authorized person, as would be required under FSMA if the aboveexemption did not apply. This document should not be relied on in connection with, or act as an inducement to enter into, anycontract or commitment whatsoever. To do so may expose you to a significant risk of losing all of the property invested and/orincurring additional liability. If you are in any doubt about the securities which are described in this document, you should consultan authorized person who specifies in investments of this type.

IMPORTANT DISCLOSURES FOR CHINA

THIS DOCUMENT IS FOR DISTRIBUTION IN PEOPLE’S REPUBLIC OF CHINA (THE “PRC”, FOR THE PURPOSE OF THIS DOCUMENT,EXCLUDING HONG KONG SPECIAL ADMINISTRATIVE REGION, MACAU SPECIAL ADMINISTRATIVE REGION AND TAIWAN) ONLY TOTHE SPECIFIC QUALIFIED DOMESTIC INSTITUTIONAL INVESTORS AS DEFINED IN THE TRIAL MEASURES FOR THE ADMINISTRATIONOF SECURITIES INVESTMENT OUTSIDE THE PRC BY QUALIFIED DOMESTIC INSTITUTIONAL INVESTORS (《合格境内机构投资者境外资券投资管理资行资法》) PROMULGATED BY THE CHINA SECURITIES REGULATORY COMMISSION (“CSRC”) ON 18 JUNE 2007,CHINA INVESTMENT CORPORATION (中国投资有限资任公司), NATIONAL SOCIAL SECURITY FUND (全国社会保障基金), QUALIFEDDOMESTIC INSURANCE COMPANIES, AND QUALIFIED DOMESTIC BANKS (COLLECTIVELY, THE “QUALIFIED DOMESTIC INVESTORS”),WHICH HAVE BEEN APPROVED BY RELEVANT PRC GOVERNMENT AUTHORITIES TO INVEST IN THE OFFSHORE STOCK MARKETS.OTHER PERSONS SHOULD NOT ACT OR RELY ON THIS DOCUMENT OR ANY OF ITS CONTENTS. NO PUBLIC MEDIA OR OTHERMEANS OF PUBLIC DISTRIBUTION OR ANNOUNCEMENT WILL BE USED WITHIN THE PRC IN CONNECTION WITH THE DELIVERYOR DISTRIBUTION OF THIS DOCUMENT. THIS DOCUMENT IS CONFIDENTIAL AND IS BEING SUPPLIED TO YOU SOLELY FOR YOURINFORMATION AND MAY NOT BE REPRODUCED, REDISTRIBUTED, DISCLOSED OR PASSED ON, IN ANY WAY, TO ANY OTHER PERSONOR PUBLISHED, IN WHOLE OR IN PART, FOR ANY OTHER PURPOSE. NEITHER THIS DOCUMENT NOR ANY PART OF IT IS INTENDEDAS, OR CONSTITUTES PROVISION OF ANY CONSULTANCY OR ADVISORY SERVICE OF SECURITIES INVESTMENT. SUBJECT TO THEFOREGOING, THE DISTRIBUTION OF THIS DOCUMENT DOES NOT CONSTITUTE A PUBLIC OFFER OF THE SHARES AS PRESCRIBEDIN ARTICLE 10 OF THE PRC SECURITIES LAW (《中资人民共和国资券法》) PROMULGATED ON 29 DECEMBER 1998, AMENDED ON27 OCTOBER 2005 AND EFFECTIVE ON 1 JANUARY 2006, AND IS NOT INTENDED AS, AND DOES NOT CONSTITUTE, PROVIDINGCONSULTING OR ADVISORY SERVICE OF SECURITIES INVESTMENT AS DEFINED UNDER THE PRC LAWS.

IMPORTANT DISCLOSURES FOR SWITZERLAND

This document is not intended to constitute an offer or solicitation to purchase or invest in the securities described herein. Thismaterial and the securities or other financial products referred to therein, are not intended for public distribution in or fromSwitzerland but are only intended to “qualified investors” within the meaning of, and in accordance with the private placement


October 21, 2016


exemptions under, the Swiss Federal Act on Collective Investment Schemes (“CISA”). Neither this document nor any other offeringor marketing material relating to the securities or other financial products may be publicly distributed or otherwise made publiclyavailable in Switzerland who is not a “qualified investor” within the meaning of article 10(3) of CISA. By accepting to receive thisdocument you acknowledge that you are such a qualified investor. This material may not be copied or handed over to any personother than the recipient except with the prior written consent of the Company. The issuer is not subject to the supervision ofthe Swiss Financial Markets Supervisory Authority (FINMA). Therefore, holders of the securities will not benefit from the specificinvestor protection under CISA and the supervision by the FINMA.

IMPORTANT DISCLOSURES FOR CANADA

THIS DOCUMENT IS STRICTLY CONFIDENTIAL TO THE RECIPIENT, MAY NOT BE DISTRIBUTED TO THE PRESS OR OTHER MEDIA ANDMAY NOT BE REPRODUCED IN ANYFORM. THIS DOCUMENT IS DIRECTED ONLY AT PERSONS WHO ARE “CANADIAN PERMITTEDCLIENTS” UNDER EITHER SECTIONS 8.18(1) OR 8.26(1) OF NATIONAL INSTRUMENT 31-103 – REGISTRATION REQUIREMENTS, ASAPPLICABLE. BRASIL PLURAL (OR AN AFFILIATE) IS RELYING UPON, AND COMPLIES WITH, THE INTERNATIONAL DEALER EXEMPTIONUNDER SECTION 8.18 OF NATIONAL INSTRUMENT 31-103 – REGISTRATION REQUIREMENTS AND/OR THE INTERNATIONAL ADVISEREXEMPTION UNDER SECTION 8.26 OF NATIONAL INSTRUMENT 31-103 – REGISTRATION REQUIREMENTS, AS APPLICABLE.

BRASIL PLURAL (or an affiliate) hereby notifies the reader that:

a. BRASIL PLURAL (or an affiliate) is not registered as a “dealer” or “adviser” in any Canadian Jurisdiction.

b. The head office or principal place ofbusiness of BRASIL PLURAL (or an affiliate) is located at São Paulo, SP, Rua Surubim, 373- 1º andar - CEP 04571-050.

c. All or substantially all of the assets of BRASIL PLURAL (or an affiliate) are situated outside of Canada.

d. An investor may experience difficulty in enforcing legal rights against BRASIL PLURAL (or an affiliate) because ofthe above.

e. The agent for service of BRASIL PLURAL (or an affiliate) in Canada is:

Borden Ladner Gervais

Scotia Plaza

40 King St W

Toronto, ON, Canada M5H 3Y4

Attention: Laurie Cook

THE DISTRIBUTION OF THIS DOCUMENT IN OTHER JURISDICTIONS MAY BE RESTRICTED BY LAW AND PERSONS INTO WHOSEPOSSESSION THIS DOCUMENT COMES SHOULD INFORM THEMSELVES ABOUT, AND OBSERVE, ANY SUCH RESTRICTIONS. ANYFAILURE TO COMPLY WITH THESE RESTRICTIONS MAY CONSTITUTE A VIOLATION OF THE LAWS OF ANY SUCH OTHER JURISDICTION.

This document does not constitute or form part of any offer for sale or subscription of, or solicitation of any offer to buy orsubscribefor, any securities nor shall it or any part of it form the basis of, or be relied on in connection with, or act as an inducement to enterinto, any contract or commitment whatsoever. Any decision on whether or not to purchase or subscribe for the Securities shouldbe taken solely on the basis of the offering particulars prepared in connection with the Offer (the “Offering Document”) only.

While the information in this document and the opinions are based on sources believed to be reliable, BRASIL PLURAL has notindependently verified the accuracy of such sources. Accordingly no representation or warranty, express or implied, is made as to,and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions containedin this document, and neither Plural nor any of its affiliates, directors, members, officers or employees shall have any liabilitywhatsoever for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection therewith.

BRASIL PLURAL (or its affiliates, officers, directors or employees) may, to the extent permitted by law, have acted upon or used theinformation herein contained before the publication of this report and may have a position in securities issued by the Company andmay make a market or act as a principal in any transactions in any such securities. BRASIL PLURAL may from time to time performinvestment banking or other services to, or solicit investment banking or other business from, the Company.

Any opinions, forecasts or estimates in this document constitute a judgment as at the date of this report. There can be noassurance that future results or events will be consistent with any such opinions, forecasts or estimates. This information is subjectto change without notice and its accuracy is not guaranteed. It may be incomplete or condensed and it may not contain allmaterial information concerning the Company. BRASIL PLURAL shall have no obligation to update the information contained inthis document.


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THIS DOCUMENT HAS BEEN FORWARDED TO YOU SOLELY FOR YOUR INFORMATION AND MAY NOT BE REPRODUCED ORREDISTRIBUTED TO ANY OTHER PERSON. BY ACCEPTING THIS DOCUMENT YOU AGREE TO BE BOUND BY THE FOREGOINGLIMITATIONS.

IMPORTANT DISCLOSURES FOR GERMANY

This report may not be reproduced or redistributed to any other person, in whole or in part, for any purpose. BRASIL PLURALCCTVM accepts no liability whatsoever for the actions of third parties in this respect.

The information has been obtained from sources believed to be reliable but BRASIL PLURAL CCTVM does not make any express orimplied representation or warranty as to the completeness, reliability or accuracy of such information. BRASIL PLURAL CCTVM isunder no obligation to update or revise this document or to advise of any changes in such data.

The information contained herein does not qualify as a public offer.

Distribution into Germany may be prohibited by regulatory laws and statutes.

IMPORTANT DISCLOSURES FOR FRANCE

This research report is for information purposes only and does not, nor is it intended to, constitute an offer, an invitation or asolicitation to buy, sell, subscribe or underwrite any investment. In particular, the research report does not constitute or comprisea prospectus for the purposes of the Directive 2003/71/EC and the relevant implementing measures in France, and shall not formthe basis of, nor may it accompany nor form part of, any right or contract to buy, sell, subscribe or underwrite any investment.The information contained herein is strictly confidential and intended for the addressees only. The research report is not intendedfor distribution to the public. It does not constitute a personal recommendation and does not take into account the particularinvestment objectives, financial situation, experience or knowledge of the addressees. The research report has been made availableto the addressees in France on the conditions that (i) the addressees are qualified investors (investisseurs qualifiés) other thanindividuals and acting for their own account, as defined in, and in accordance with, Article D. 411-1 of the French Code monétaireet financier, and (ii) the research report shall not be published, passed on, disclosed, distributed or made available, directly orindirectly, to any other person nor reproduced, in whole or in part, for any purpose, by the addressees.

Copyright 2016 Brasil Plural CCTVM and/or its affiliates. All rights reserved.


October 21, 2016


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P&P Initiation 2016