|Shares Out. (in M):||242||P/E||0.0x||0.0x|
|Market Cap (in M):||802||P/FCF||0.0x||0.0x|
|Net Debt (in M):||223||EBIT||0||0|
I am recommending a long position in Ainsworth Lumber Co. (ANS-T), a low-cost wood panel producer.
ANS is a wood panel commodity producer (specifically, Oriented Strand Board, “OSB”) with fortunes primarily tied to U.S. Housing activity.
While an investment in ANS represents good value in its own right, the path to unlocking ANS’s value is filled with near to medium term
In terms of valuation, I see sustainable FCF generation in the $0.45-$0.50 per share range and come up with a DCF target of $4.20
Draconian Downside: $2.50
Current share price: $3.20
DCF value: $4.20 (annual FCF in $0.40 to $0.50 range)
Multiple re-rate relative to comps: $3.59-$5
There is also a ~$360 mln US non-capital tax loss carry forward that expires starting 2026. If realized that would add ~ $0.15
What is OSB?
OSB stands for Oriented Strand Board and is a wood panel product used in home construction (~45%) (think wall sheathing,
Clearly OSB demand is driven by US housing starts and housing activity (renovations).
On the supply side, we can look at OSB capacity (what productive capacity is out there) and OSB “effective” capacity
Who are the OSB players?
Thanks to the bursting of the US housing bubble, the North American OSB industry has consolidated in recent years.
Anything special about OSB?
Yes, as an engineered wood product, it has essentially the same structural properties as plywood panels but it is a lot
If I think US Housing Would Rebound, Why Not Lumber?
Especially from a Canadian perspective, OSB represents less risk because its fibre input is mostly hardwood, not softwood.
Commentary on OSB Prices:
OSB prices have historically been volatile. During the US housing boom, OSB prices peaked in 2004 at US$371/msf,
Year to date, OSB prices peaked in March/April at ~US$425/msf. Since then, OSB prices tumbled down to US$240/msf.
History of Ainsworth (please read the filings for the nitty gritty):
It is very interesting “Ainsworth Lumber” is neither run by/controlled by the Ainsworth family anymore, nor do they produce
At any rate, the bursting of the US housing bubble forced ANS to recapitalize in 2008 in order to bring its $1 billion in debt
1) Help cut G&A almost in half when compared to 2007 levels
2) With mill closures and disciplined capex spend, OSB production costs are now in the $175/msf range vs $235/msf pre-recap
3) Installed a competent CEO with 23 years’ experience at LPX (who else can help get ANS trading at a LPX multiple?)
4) Installed a former BAM Senior Vice President as CFO
5) Put 3 BAM guys on the board
6) Further delever balance sheet via a rights offering (net debt now ~$220 mln, all the way from $1 bln pre-recap) and senior note refinancing
7) Arranged for the acquisition of 50% interest in High Level mill from its bankrupt JV partner Grant Forest Products for $20 mln (or $47/msf).
|Buyer||Seller||Location||TX Value||Capacity (mmsf)||C$/msf|
|Norbord||International Paper||US South||250||1155||$ 216|
|Ainsworth||Boise/Voyageur||Ontario CAN||193||440||$ 439|
|Tolko||Weyerhaeuser||BC CAN||38||240||$ 158|
|Georgia Pacific||Grant Forest Products||Various||430||2250||$ 191|
|Ainsworth||Grant Forest Products||50% High Level||20||430||$ 47|
|Arbec||Weyerhaeuser||New Brunswick CAN||48||430||$ 110|
Completing its transformation into a low-cost producer, with a right-sized balance sheet and an option to grow production by 50%,
|Costs and Expenses|
|Cost of products sold||460.5||341.1||263.1||259.6||264.6||287.2||280.0||385.0||411.3||411.3|
|Selling and administration||30.8||29.2||19.7||18.6||17.4||16.4||16.7||16.9||17.2||17.4|
|Costs of curtailed operations/Other||66.1||- 2.0||2.5||2.1||3.3||3.7||2.0|
|Income from Ops||- 143.5||- 44.9||- 35.7||19.9||- 16.1||76.1||131.1||110.3||117.9||115.6|
|Finance expense||- 77.1||- 87.7||- 53.1||- 49.5||- 49.8||- 50.8||27.2||27.2||27.2||27.2|
|Loss on early repayment of LT Debt||-||- 22.9|
|FX Gain (Loss)||151.9||- 107.1||80.6||29.0||- 11.1||9.4|
|Gain (Loss) on derivatives||- 9.9||6.2||- 6.2||24.0|
|Gain on acquisition of High Level||72.5||-|
|Other items||6.0||2.8||3.8||5.3||1.6||- 1.2|
|EBT||- 62.7||- 246.8||- 4.4||10.9||- 9.1||34.7||158.3||137.5||145.1||142.8|
|Taxes||30.7||13.3||20.3||- 0.6||16.7||- 5.9||- 47.5||- 41.2||- 43.5||- 42.8|
|Income from Continuing Ops||- 32.0||- 233.5||15.9||10.3||7.6||28.8||110.8||96.2||101.6||100.0|
|Net Income from Discon't Ops||- 184.4||- 88.3||- 37.5||- 0.9||0.7||- 0.4|
|Net Income||- 216.5||- 321.8||- 21.6||9.4||8.3||28.4||110.8||96.2||101.6||100.0|
|EPS||-$ 14.78||-$ 0.22||$ 0.09||$ 0.09||$ 0.28||$ 1.28||$ 2.28||$ 3.28||$ 4.28|
|EBITDA||- 21.21||- 9.30||- 34.90||9.51||215.50||196.67||207.27||207.02|
|Actuarial Losses||- 4.9||- 4.6|
|BVPS||$ 2.08||$ 2.17||$ 1.88||$ 3.76||$ 1.74|
|Net Debt||- 407.6||- 396.6||- 455.7||- 249.1||- 222.7|
|Net Debt per share||-$ 4.08||-$ 3.94||-$ 4.52||-$ 2.43||-$ 0.92|
|Cash from Ops||- 127.3||- 55.6||- 35.3||6.8||- 27.0||68.1||140.8||128.2||136.6||137.0|
|Capex||- 70.1||- 8.6||- 6.8||- 10.2||- 7.8||- 6.0||- 30.0||- 25.0||- 20.0||- 12.0|
|FCF||- 197.4||- 64.2||- 42.1||- 3.4||- 34.9||62.1||110.8||103.2||116.6||125.0|
|FCF per share||-$ 13.48||-$ 0.42||-$ 0.03||-$ 0.35||$ 0.61||$ 0.46||$ 0.43||$ 0.48||$ 0.52|
|Base Case||2 $325 OSB yrs||4 $300 OSB yrs||2 $162 OSB yrs||$200 OSB forever|
|ANS DCF Value per share||$ 4.15||$ 5.08||$ 5.86||$ 3.38||$ 2.50|
|Theoretical dividend @ 30% FCF||$ 0.14|
|Theoretical current div yield||4%|
As a side note, you will see most of ANS’s wood fibre supply is accounted for with long-term contracts which limits the risk of
Commentary on Brookfield Asset Management:
While it is exciting to have a business trading at a material discount to my intrinsic value estimate, it is even more exciting
While you may not like BAM’s investment style (especially if you’re Bill Ackman,
BAM’s Involvement in Paper and Forest Products Industry
BAM through its various subsidiaries have been fairly active in acquiring stakes in building materials (i.e. lumber and panels)
1) Unlike commodities facing structural declines (like paper products), building materials demand is cyclical and BAM is fairly
2) Some forestry companies are run by entrenched founding families that are not particularly good at capital allocation or
3) BAM employs some fairly senior forestry industry people and former sell-side analysts (i.e. http://ca.linkedin.com/pub/reid-carter/11/b48/4b0)
BAM now wants to sell
In recent conference calls, BAM has made it pretty clear they are interested in divesting their forestry related investments given:
Clearly, BAM isn’t just talking about this and they are taking action in realizing value. Not only that, they seem to do everything
How BAM Extracts Value:
Unlike the outright Longview sale, BAM’s approach to Canadian building material companies have been a little different.
Norbord (OSB producer)
- Heading into the financial crisis, NBD had too much debt on its balance sheet and began burning cash
- At the end of 2008/early 2009, NBD did a rights offering fully backstopped by BAM to delever its balance sheet
- Irrational fear drove NBD’s share price below the rights’ exercise price and BAM backstopped the offering
- With help from a recovering US housing market, NBD also improved its operations under BAM’s guidance
- Over the past ~2 years, NBD (I’m sure with BAM’s input) had a couple of share buyback programs. BAM also used this
- Most recently, NBD announced in April 2013 a variable dividend based on FCF starting in June 2013.
Western Forest Products (Lumber producer):
- Formerly known as Doman Industries, a forestry company founded by the Doman family
- Similar to Ainsworth, Doman had a levered balance sheet, a questionable capital allocation strategy
- BAM got involved as housing downturn began
- WEF also did a rights offering in Dec 2008 to help improve balance sheet. BAM (through Tricap its restructuring arm)
- New management team installed, operations improved, costs cut
- Requests sell-side coverage (see recent initiation reports)
- Just this week announced initiating a dividend and a $100 mln dutch auction (share buyback) which BAM will participate
Unlocking ANS Value Imminent
Given the pattern of how BAM operates, I think BAM is highly likely to follow the same playbook for ANS. In fact, with the
I am very confident that BAM is keenly aware and irritated that ANS trades at a discount to both NBD and LPX
|Stock Price||$ 3.13||$ 29.65||$ 15.13|
|Market Cap||$ 756||1592||2101|
|EV||$ 979||$ 1,868||$ 2,421|
|2013E consensus EBITDA||217.83||373.44||$ 371.9|
|2014E consensus EBITDA||263.33||360.67||$ 445.2|
|If ANS trades at NBD multiple||$ 3.59||$ 4.72|
|If ANS trades at LPX multiple||$ 4.95||$ 5.01|
Unlocking Value Via M&A:
BAM Happens to own 65% of Norbord (16% OSB market share) AND 55% Ainsworth (10% OSB market share).
Why does this opportunity exist:
- Horrible shareholder experience with ANS before restructuring
- Virtually no sell-side coverage until recently
- Multiple discount due to lack of dividend
- Financial restructuring via rights offering and debt refinancing not well understood
- Volatility in underlying OSB commodity (-50% from March 2013 peak) driving fear
- Weaker US housing markets and OSB oversupply
- Lack of industry supply discipline
- Strengthening C$
- BAM rips off minority shareholders (i.e. via egregious management contracts, incentive fees, etc.)
Disclaimer: The write-up is only intended for VIC members and not for dissemination.
- Dividend and/or share buyback announcement and multiple re-rate
- Growth in productive capacity via High Level mill restart
- Merger with Norbord, realizing synergies and multiple re-rate (to LPX)
- Outright sale
- Continued deleveraging of balance sheet
|Subject||A few questions|
|Entry||07/08/2013 01:27 AM|
Thanks for sharing. I have a few questions:
1. What are the components of their cash costs?
2. What is the outlook for Canadian housing?
3. Do you have an estimate for the replacement value of their capacity?
4. Why are OSB prices down 50% since March?
|Subject||RE: RE: A few questions|
|Entry||07/08/2013 11:15 AM|
Thanks for the idea . . . a few additional questions:
1. Why does ANS have such higher margins than NBD and LPX if those competitors are so much larger? You mentioned that NBD/LPX have $30 - $50/msf lower margins - what explains that in a commodity business?
2. What do you think "normalized" earnings are for the company? i.e. if you use your long term $235 OSB benchmark price, some estimate for LT run-rate capacity and production, margins, capital structure, etc? By my math, LTM EBITDA = $160mm less $25mm of D&A/capex less $28mm interest expense and 30% taxes = $75mm in net income / FCF. That would equate to just under 11x. I guess you would say that LT earnings power is higher because of increased production, offset by somewhat lower prices than LTM's ~$290/msf?
3. On your financial projections, it appears that you are adding the financial expense to EBIT? $131mm EBIT + $27.2mm interest = $158.3 in EBT?
|Subject||Question / Comment|
|Entry||07/08/2013 01:48 PM|
Thanks for the post on ANS. We have been watching ANS and agree it starts to look interesting in the low 3s ... that said, he's a philosphical question for you and others on the thread and therefore maybe a slight pushback on your valuation / buy rating. If you think fair value is $4.20, is 25% upside enough to justify in a small cap, highly cyclical, somewhat illiquid and volitile equity, particulalry in light of mortage rates that are close to having a 5 handle? Said another way, at $3.20 its at the mid-point between your fair value and your 'dranconian downside' value. We'd argue that's not enough upside to justify an investment at these prices unless you believe $4.20 is understating fair value (for the sake of being conservative) or that there's a good probability of an upside case playing out that gets the stock into the 5s ... Structually we like the fact that ANS, as a smallish player in a fairly consolidated industry, might be able to bring on mothballed capacity representing material volume growth without flooding the OSB market and perhaps this could be a path towards the upside case (as opposed to betting on a strong OSB pricing rebound which we don't feel qualified to project). Can you comment on whether you think there's upside to your fair value and any thoughts on probabilities of the upside case playing out? Thanks
|Entry||09/05/2013 09:18 AM|
congrats! Not as high as some of your targets but better than nothing?