seattle, april 2017 adolfo ibáñez university - chile · swot analysis by industry sector...
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Seattle, April 2017 Adolfo Ibáñez University - Chile
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5000
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7000
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20-nov.-11 20-nov.-12 20-nov.-13 20-nov.-14 20-nov.-15 20-nov.-16 20-nov.-17
Shar
e P
rice
Recommendation - BUY
$6,380 CLP
(11-21-2016)
$7,362 CLP (12-month Target)
• Copec has a sustainable competitive advantage
• An Intensive investment strategy • Strong financial position that would allow the
Company to face times of turmoil • Stable cash generation from its fuel business
COPEC:CI
$7,168 CLP (03-27-2017)
Market Data
Market Cap 12.44 billions
EBITDA (2015) US$ 1,989 MM
Avg Daily Vol US$ 7 MM
EV/EBITDA 7.34x
Current Price CLP 6,380
Target Price CLP 7,362
Div. Yield 18.90%
Upside potential 17.30%
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Company Overview – Main Features • Copec is a diversified holding, second largest Chilean company in terms of Market Cap in Chile
• More than 80 years of history • Controlled by the Angelini family (74%) • With strong presence in Forestry & Fuel Industries
74%
11%
6% 9%
Ownership Structure
Angelini group Matte group Pension funds Others
Forestry 67%
Fuel 32%
EBITDA Composition
Company overview Industry &
Competitors Financial Analysis Valuation Risk Analysis Conclusion
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0
1000
2000
3000
2013 2014 2015
Forestry Sales per Product (MM US$)
Pulp Sawn Timber Panels
1st producer of Sawn timber in Latin America
2nd largest market pulp producer in the world
2nd largest panel producer in the world
Company Overview – Forestry (Arauco)
Forestry 67%
EBITDA (US$ 1,333MM)
Company overview Industry &
Competitors Financial Analysis Valuation Risk Analysis Conclusion
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Fuel 32%
EBITDA (US$ 637MM)
Fuel 32%
60% Market Share in Chile (Fuel)
536 MM US$ acquisition of MAPCO
Over 1,000 MM US$ in CAPEX full year 2016
Company overview Industry &
Competitors Financial Analysis Valuation Risk Analysis Conclusion
Company Overview – Fuel (Copec & Others)
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SWOT Analysis by industry sector
Porter’s Five Forces
Industries: FORESTRY – FUEL
• Industry rivalry HIGH - MODERATE
• Bargaining power of buyers HIGH - LOW
• Threat of substitutes MODERATE - LOW
• Bargaining power of suppliers VERY LOW-HIGH
• Threat of new entrants LOW – LOW
Company overview Industry &
Competitors Financial Analysis Valuation Risk Analysis Conclusion
1
2
3
4
5
Threat of newentrants
Threat ofsubstitutes
Bargainingpower of
buyers
Bargainingpower ofsuppliers
Industry rivalry
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600
700
800
900
1000
1100PULP PRICES (US$/ton)
BHKP Short Fiber
NBSK Long Fiber
Industry Overview – Demand drivers • Diversified portfolio of Clients
• Potential upside in Asia (61% of Arauco’s pulp sales),
low per capita consumption compared to other markets
• Panel and sawmill sales based on housing starts (US)
• Future pulp prices are expected to grow
WORLD PULP SUPPLY CURVE
Company overview Industry &
Competitors Financial Analysis Valuation Risk Analysis Conclusion
0
500
1000
1500
2012 2013 2014 2015 2016E 2017E
(in
th
ou
san
ds)
UNITED STATES HOUSING STARTS
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Trees Growth rate
Units in (m^3ssc/ha/year)
• Strategic Forest-to-Mill-to-Port distance
• Energy inputs hedged • Best softwood and hardwood growth rate
Specie Avg. Hardwood growth rate
Country
Eucalyptus 43 Brazil E. Nitens 43 Chile
Acacia Magnium 23 Laos, Vietnam, Camboya and
Australia
E.Globulus 20 Chile
E.Globolus Iberian 11 Australia and
Tasmania
Specie Avg. Softwood growth rate Country
Radiata Pine
19 Chile 11 USA
5 Canada
4 Scandinavia
2 Russia
Company overview Industry &
Competitors Financial Analysis Valuation Risk Analysis Conclusion
Industry Overview – Competitive Advantages
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Industry Overview – Fuel Advantages
• Service Stations 42.1% service stations market share • Convenience Stores Largest convenience store network in Chile • Lubricants 52.2% market share • Industrial Channel 56% of share in aeronautical market More than 3,500 industrial clients
58% 21%
13% 8%
Liquid Fuels - Market Share
Copec
Shell
Petrobras
Otros
85%
8%
1% 6%
Título del gráfico
Copec
Shell
Other/none
Petrobras
Preference of service stations in Chilean highways 2014 market poll
As of September 2016
Company overview Industry &
Competitors Financial Analysis Valuation Risk Analysis Conclusion
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Industry Overview – Forecasts
• Oil demand is expected to grow over 1.53% per year in developing countries
• OPEC recently agree to cut down oil supply
World primary Energy demand growth (2014-2040)
Oil 0.6%
Gas 2.1%
Company overview Industry &
Competitors Financial Analysis Valuation Risk Analysis Conclusion
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Financial Analysis – Cash Generation
$ -
$ 500
$ 1.000
$ 1.500
2014 2015 2016E
EBITDA Generation (MM US$)
FUELS FORESTRY
70.8%
28.3%
0.8%
Consolidated Sales
FUELS FORESTRY OTHERS
• Strong, steady cash generation from Fuels & Distribution
• Financial backup for times of
turmoil
EBITDA Fuels as a % of Forestry EBITDA
2014 2015 2016E
55.3% 56.5% 67.8%
Company overview Industry &
Competitors Financial Analysis Valuation Risk Analysis Conclusion
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-20%
0%
20%
40%
0
1000
2000
3000
2013 2014 2015 2016E 2017E 2018E 2019E 2020E
• From 2017 onwards, the recent acquisitions will improve EBITDA generation
• Year 2016 record CAPEX of $2,021 mm • Net Financial Debt/EBITDA ratio surpassed
Company target of 2.5x
EBITDA & EBITDA MARGIN GROWTH (RHS)
NET DEBT/EBITDA
Company overview Industry &
Competitors Financial Analysis Valuation Risk Analysis Conclusion
FINANCIAL NET DEBT/EBITDA
Selected ratios
2013 2014 2015
EBITDA mg. 7.6% 9.8% 13.3%
EBITDA/Int exp 6.0x 7.8x 7.7x
CFO/Total Liabilities 14.5x 12.3x 15.0x
Financial Analysis – EBITDA generation
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Company overview Industry &
Competitors Financial Analysis Valuation Risk Analysis Conclusion
0
500
1000
1500
2000
2500
2013 2014 2015 2016
in m
illio
ns
US$
CAPEX in US$ million
RECENT INVESTMENTS
FORESTRY TAFISA US$ 153 MM
GRAYLING US$ 400 MM
FUELS MAPCO US$ 535 MM
EXXON-MOBIL US$ 747 MM
+33% +9%
0
5000
10000
2015 2016 2018
in t
ho
usa
nd
m3
Wooden panels Capacity increase
Financial Analysis – New Investments
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Valuation - Methodology
DCF
$7,375 CLP
(relative weight of 75%)
MULTIPLES
$7,322 CLP (relative
weight of 25%)
$7,362 CLP
(Upside potential
17.3%)
Target Price
Company overview Industry &
Competitors Financial Analysis Valuation Risk Analysis Conclusion
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Valuation – Income Approach - DCF • WACC rates for each business segment in US$
• Cost of equity calculated using modified
CAPM and unlevered betas from Damodaran • Cost of debt reflect the current situation
Copec bonds
• Target capital structure considered and corporate tax rate of Chile
• Perpetual growth based on GDP growth
expectations and industry forecasts • Discount rate includes the different countries
risk exposures
EBITDA GROWTH 2016E 2017E 2018E 2019E 2020E Empresas Copec -10% 29% 9% 5% 5%
Forestry -16% 31% 8% 1% 3%
Fuel 0% 27% 11% 9% 9%
Company overview Industry &
Competitors Financial Analysis Valuation Risk Analysis Conclusion
Key Valuation Assumptions
WACC FORESTRY 8.9%
WACC FUEL 7.8%
Ke Forestry 11.4%
Ke Fuel 10.7%
Beta Forestry 1.40
Beta Fuel 0.90
D/E 39%
Corporate Debt Cost 4.7%
Perpetual growth Forestry 2.9%
Perpetual growth Fuel 1.9%
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DCF Valuation – Sensitivity Analysis
Target Price ($7,362)
Company overview Industry &
Competitors Financial Analysis Valuation Risk Analysis Conclusion
85% Upside probability
Valuation date Price ($6,380)
• WACC Rate • Perpetual growth rate • Sales growth
• Margin expansion/contraction • Exchange Rate (CLP/USD)
Equity Value (DCF) ($ CLP)
Share Price Calculated with Perpetuity (G)
2.0% 2.5% 3.0%
8,445 9,323 10,395 7,542 8,261 9,124 6,776 7,375 8,082 6,120 6,624 7,212 5,551 5,980 6,476
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Market Approach Valuation – EV/EBITDA Multiple
*MULTIPLES WHERE CALCULATED USING INTERNATIONAL PEERS WITH SIMILAR SIZE AND TYPE OF OPERATIONS
FORESTRY PEERS:
FUEL PEERS:
EV/EBITDA SECTOR WEIGHT AS % OF
EBITDA
9.5x Forestry 67%
10.4X Fuel 33%
9.8X Empresas Copec 100%
Company overview Industry &
Competitors Financial Analysis Valuation Risk Analysis Conclusion
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Investment Risks
Company overview Industry &
Competitors Financial Analysis Valuation Risk Analysis Conclusion
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• Lower than expected consumption in China could decrease international pulp prices
• Climate change may lead to a stricter framework
0
5.000
10.000
19
64
19
68
19
72
19
76
19
80
19
84
19
88
19
92
19
96
20
00
20
04
20
08
20
12
Forest fires per season
4,50%5,50%6,50%7,50%8,50%9,50%
01-0
3-2
014
01-0
5-2
014
01-0
7-2
014
01-0
9-2
01
4
01-1
1-2
014
01-0
1-2
015
01-0
3-2
015
01-0
5-2
015
01-0
7-2
015
01-0
9-2
015
01-1
1-2
015
01-0
1-2
016
01-0
3-2
016
01-0
5-2
016
01-0
7-2
016
01-0
9-2
016
China consumption % variation YoY
Company overview Industry &
Competitors Financial Analysis Valuation Risk Analysis Conclusion
Investment Risks – Market & Others
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Investment Risks – Framework & Regulatory
• Stronger Stakeholders: Empowerment of communities may detain projects
• Chilean labor reform will significantly increase the bargaining power of workers
0
50
100
150
2009 2010 2011 2012 2013
Number of manifestations per year in Santiago
Company overview Industry &
Competitors Financial Analysis Valuation Risk Analysis Conclusion
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Conclusion – BUY Recommendation
BUY
Current Price:$6,380 Target Price: $7,362
Intensive investment strategy will translate
in higher EBITDA
Expeted higher prices in pulp products
Future panel demand foster by housing
starts in USA
Sustainable competitive advantages
Company overview Industry &
Competitors Financial Analysis Valuation Risk Analysis Conclusion
Strong cash generation
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CFA Institute Research Challenge
Seattle, USA
Adolfo Ibáñez University – Chile Roberto Bravo
Ricardo Lewysohn
Nicolás Libuy
Brian Thornton
Joaquín Villalobos
Thanks for your attention!
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• Corporate Governance Exhibit 1 • Industry Overview, Forestry Exhibit 2 • Industry Overview, Fuel Exhibit 3 • Arauco’s Pulp Cash Cost Exhibit 4 • Competitive Position Forestry Exhibit 5 • Breakdown of Forestry Sales Exhibit 6 • Cash Cost & Transportation Exhibit 7 • New Forestry Projects Exhibit 8 • EBITDA Margins Exhibit 9 • Energy Production Exhibit 10 • WACC Exhibit 11 • FCF Forestry Exhibit 12
• FCF Fuel Exhibit 13 • FCF Fishing & Others Exhibit 14 • Valuation Summary Exhibit 15 • Multiples Valuation Exhibit 16 • History Exhibit 17 • Market Leaders Exhibit 18 • Arauco Participation Exhibit 19 • Arauco Sales Exhibit 20 • Forestry distances Exhibit 21 • Investments Exhibit 22 • Risks Exhibit 23-24 • Buy Recomendation Exhibit 25
Exhibit Index
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Exhibit 1 - Corporate Governance
0
2
4
6
8
10
12
14
LuksicFamily
MatteFamily
SolariFamily
HorstPaulmann
AngeliniFamily
SebastiánPiñera
ÁlvaroSaieh
JulioPonce
Wealthiest chilean families (US$ bn)
• Roberto Angelini’s new leadership • Lack of independence in the Board
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012345
Threat ofnew entrants
Threat ofsubstitutes
Bargainingpower of
buyers
Bargainingpower ofsuppliers
Industryrivalry
Porter’s Five Forces
• Threat of new entrants - LOW
• Threat of substitutes - MODERATE
• Bargaining power of buyers - HIGH
• Bargaining power of suppliers -VERY LOW
• Industry rivalry - VERY HIGH
Exhibit 2 – Industry Overview, Forestry
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012345
Threat of newentrants
Threat ofsubstitutes
Bargainingpower of…
Bargainingpower of…
Industryrivalry
Porter’s Five Forces
• Threat of new entrants - LOW
• Threat of substitutes - LOW
• Bargaining power of buyers - LOW
• Bargaining power of suppliers - HIGH
• Industry rivalry - MODERATE
Exhibit 3 – Industry Overview, Fuel
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Exhibit 4 – Arauco’s Pulp Cash Cost
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Exhibit 5 – Competitive Position Forestry
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Exhibit 6 – Breakdown of Forestry Sales
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Exhibit 7 – Cash Cost & Transportation
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Exhibit 8 – New Forestry Projects
Projects
2016 Location Cap (tons) Grade Date
Klabin Brazil 1,500,000 Short/long fibre 1Q16
Svetlogorsky Belarus 250,000 Long fibre 1Q16
Sodra Varo/Sweden 275,000 Long fibre 3Q16
APP-OKI Indonesia 1,800,000 Short fibre 3Q16
Total 3,825,000
2017
Fibria Brazil 1,950,000 Short fibre 4Q17
Total 1,950,000
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0,0%
5,0%
10,0%
15,0%
20,0%
25,0%
30,0%
2012 2013 2014 2015
EBITDA Margin
FORESTRY
FUEL
Exhibit 9 – EBITDA Margins
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513
253
0
200
400
600
800
1000
MW
Arauco’s Energy Production
Consumption Surplus
Exhibit 10 – Energy Production
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Exhibit 11 - WACC
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Exhibit 12 – FCF Forestry
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Exhibit 13 – FCF Fuel
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Exhibit 14 – FCF Fishing & Others
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Exhibit 15 – Valuation Summary
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Exhibit 16 – Multiples Valuation
EBITDA 1,989 EV 19,457 Net Debt 4,880 Minority Interest 528 Equity in MM USD 14,049 Share price in CLP 7,322
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Exhibit 17 – History
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Exhibit 18 – Market Leaders
Pulp Sawn Timber Wooden Panels
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Exhibit 19 – Arauco participation
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Exhibit 20 – Arauco Sales
Sales office % of total sales
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Exhibit 21 – Forest to Mill to Port Distance
Average distance from
forests to plants Average distance from plants to
ports
(weighted average)
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Exhibit 22 – Investments Acquisition of the 100% of
MAPCO shares. The price paid was US$535 million.
Investment of US$ 747 million to produce and distribute Mobil
lubricants.
Purchase of 50% of Tafisa in US$153 million through a joint venture with Sonae Industria.
MDP Grayling project approved with an investment of US$400
million.
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Exhibit 23 – Risks
China is the country with the greatest impact on the pulp market and its prices. If the Asian giant's economy fails to keep the demand growth for pulp, this would imply a decrease of the international prices.
Altought China’s consumption has slowed down, their demand for pulp is increasing 14% per year and the international pulp price is reaching the marginal cost of some producers.
4,50%5,50%6,50%7,50%8,50%9,50%
01
-03
-20
14
01
-05
-20
14
01
-07
-20
14
01
-09
-20
14
01
-11
-20
14
01
-01
-20
15
01
-03
-20
15
01
-05
-20
15
01
-07
-20
15
01
-09
-20
15
01
-11
-20
15
01
-01
-20
16
01
-03
-20
16
01
-05
-20
16
01
-07
-20
16
01
-09
-20
16
China consumption % variation YoY
0
2000
4000
6000
8000
China's GDP per capita (USD)
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Exhibit 24 – Risks
• Chilean Labour Reform
• Extension of the coverage of collective bargaining
A floor of the benefits to be negotiated between employers and employees and recognition of the effective strike
• Prohibition of the replacement of striking workers as a collective exercise right
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Exhibit 25 – Buy Recomendation
Upside potencial > Cost of Equity => Buy Recomendation
Cost of Equity % Weight Ke Forestry 11.43% 67% Ke Fuel 10.66% 33% Ke Empresas Copec 11.17% 100%
Upside potencial 17.30%