Brazil Pulp Producer VCP a Hold
We are keeping our Hold recommendation on Brazilian pulp-producer Votorantim Celulose e Papel S.A. (VCP). Demand for pulp and paper remains heated in Brazil and abroad, especially in Asia, which is keeping prices elevated. Guidance for the second quarter of 2008 was positive, and the short-term outlook for the pulp and paper market remains encouraging.
However, sales have stagnated and the higher worldwide inflation and interest rates are source of great concern. The continued strength of the Brazilian real undermines the company's exports and increases domestic competition.
There has been a demand decline in North America. Nevertheless, pulp market conditions remain tight and prices are still rising, even in the U.S. market. The current cost structure and lack of investments have led to closures of excess capacity. The continued devaluation of the U.S. dollar has been not only forcing prices up, but also the closure of less competitive facilities.
The company has been going through a restructuring process which is undermining short-term results. During the first quarter, revenues were flat year over year, pulp sales were up 20% and paper sales were down 45% in the same period. The short-term growth outlook does not seem particularly promising.
VCP shares are trading at 12.7x our 2008 earnings estimate, close to the industry median. VCP posted a positive guidance for the second quarter of 2008 and the outlook for pulp prices in the near future remains encouraging. The likelihood for a recession in the U.S. remains a real threat for commodity prices in general and pulp in particular. We expect shares to trade closer to the current valuation of industry median, around 13.5x our 2008 EPS. Our target price is $28.25.
Headwinds Face The SCOR Group
The SCOR Group (SCRYY) reported solid improvements in its earnings and net written premiums for the first-quarter, offsetting the effect of the higher costs. The new innovative Hub structure is expected to further streamline operations and increase proximity to markets and clients.
While the company has greatly improved its capitalization, risk profile, and operating performance in the recent quarters, we expect it to face some headwinds in the coming quarters, as a result of softening prices and integration risks with Revios and Converium. At current levels, we continue to rate the shares of SCOR a Hold.
Our target price of $2.48 is based on the company selling in line with the insurance industry as a whole, and we have set a target P/E of approximately 5.5 times our 2008 earnings estimate of $0.45 per share. The book value of the share was $29.73 at the end of the first quarter, which gives the company a price-to-book ratio of 0.07, less than the industry average.
