At Klabin, a cardboard with no return
Klabin’s new project went down squarely. Investors question the ability to return on investment of R$ 1.57 billion in the Figueira Project, announced last night, which consists of a corrugated cardboard factory in Piracicaba, in the interior of São Paulo. The discomfort was not only in the market, with criticism from analysts and the 5% drop in units right at the opening of the trading session (they closed the day with a fall of 3.2% and the preferred fell 3.96%), but also in part of the company’s board of directors.
On the board of 14 directors, three independents – Camilo Marcantonio, Mauro Cunha and Isabella Saboya – expressed their displeasure with the draft in the minutes (although only Marcantonio and Cunha voted against it). Also classified as independent, directors Roberto Klabin and Sérgio Guimarães, director of Monteiro Aranha, abstained from voting, but expressed concern at the meeting that there would not be an in-depth strategic discussion by the board. The group points out value destruction with the project and a certain lack of alignment between the board and the board.
According to Marcantonio, who manages Charles River Capital, the Figueira Project has a negative net present value (NPV) in 20 years and a very low return even in perpetuity. “Considering the recent interest rate hike, which implies an increase in our cost of capital, the NPV in perpetuity should be even lower, or even negative,” he wrote.
According to Klabin’s statement, the disbursement of the Figueira Project starts this year and runs until 2024, using cash. The company argues that the project and the addition of capacity from the Horizonte Project will raise the nominal capacity for converting corrugated cardboard, used in packaging, to approximately 1.3 million tonnes per year. In Figueira, he states that around R$ 200 million of the total investment are recoverable taxes.
Marcantonio had asked in a previous meeting to detail the return on invested capital of the corrugated cardboard conversion segment. Data for 2020 and 2021 indicated the segment’s ROIC below the cost of capital – “which is particularly negative because these years have been very positive for the segment, with significant price increases, both due to the high consumption of packaging during the pandemic, as well as the impacts on supply due to the disruption of supply chains”, he observes.
He also makes clear his discomfort with the fact that it is a project practically defined by the company’s board and not within the scope of the board, which should play this strategic role, and criticizes what could be a potential motivation. “We have an aggravating factor, which is Klabin’s incentive system, which places great emphasis on short-term results, such as the generation of annual Ebitda, and less on the return on its investments. We have gradually evolved in terms of compensation, but I believe that we still need to substantially increase the proportion of long-term incentives and metrics that reward value creation.”
Cunha had proposed at another meeting an analysis on the generation of value in using cash to buy back shares and Marcantonio considers that, in his preliminary analyses, this strategy would provide a better return than the Figueira Project.
At yesterday’s meeting, Cunha praised the administration for the transparency in presenting the project – transparency, as he suggested, was to make it clear that the business has little chance of being profitable. He joined the chorus that this is not the best use of capital for the company at the moment and that, as there is already an increase in capacity in the IP and Horizonte projects, he understands that not carrying out the project does not compromise Klabin’s business model. “The low return is exacerbated by the recent increase in the risk-free rate, which increases the WACC and leads to value destruction”, adds Cunha.
To Pipeline, Klabin says that the approved investment reinforces the company’s strategy of integration, from the forest base to paper packaging, in addition to improving operational efficiency. “The project is in line with the Company’s growth plans, global trends in e-commerce, sustainability and customer brand visibility due to the high quality of printing on the packaging.”
Klabin also said that it always seeks to create value for its shareholders and other stakeholders and remains attentive to opportunities. “The company reinforces its belief in its business model – integrated, diversified and flexible – which, combined with discipline in capital allocation, enabled the delivery of 12 consecutive years of growth in Ebitda and ROIC of 20.1% in the last 12 months” , he added.
Although she voted in favour, councilor Isabella Saboya acknowledges doubts about Figueira – “notably because alternative projects such as investment in an integrated paper mill and/or integration with recycling machines made in conjunction with the corrugated cardboard project are not discussed at the start ”.
Saboya adds that the project alone does not seem to be attractive in terms of financial returns, but says that he chose to use his “right to trust”, giving the administration the benefit of the doubt. “It is evident from the votes against that the absence of this joint strategic planning between management and board damages the good dynamics of the body and the essential alignment between management and board”, recorded Saboya.
Itaú BBA calculates that the investment demand per ton in the project is R$ 6,500, a cost above the average for M&A operations in the sector in the country. “According to our preliminary calculations, the project does not appear to be attractive from a financial point of view. On the positive side, we recognize the resilience of earnings following the integration of kraftliner paper in the production of corrugated boxes”, write the analysts led by Daniel Sasson.
XP also compared the EV/Ebitda multiple of the Figueira Project with the acquisition of International Paper’s units in Brazil two years ago. In the new plant, the proportion of investment against the ton produced is more than six times greater than in the M&A. The broker, however, has reservations, as the acquisition of IP was particularly advantageous.
“We recognize that the comparison is not 100% fair, as the IP acquisition ticket of R$1,100 per ton was lower than the industry average; the IP plants were depreciated, while the Figueira Project is a completely new plant; cost inflation from 2020 to 2022 should impact construction capex,” pondered analyst Andre Vidal.
When citing the incentive model and the relationship with the board, the reservations of the independent directors seem to point out a certain discomfort with the company’s governance – an issue that has been much debated in the recent past in relation to the collection of royalties from the founding family for the use of its surname as brand.
Source: Value Pipeline