Description
Glatfelter Company is a very timely BUY. Monetization of part and potentially all of the timber assets will unfold as management shortly concludes an appraisal assets. Also, management has indicated that they may look to sell the entire Company. All or part of these events will occur in the next year. Current upside is $19.50-22.30 per share or 34-53%.
The Company owns 80K acres of timberland in Virginia, Delaware, and Pennsylvania. On the 2Q05 conference call management noted that there are 5,000 to 15,000 acres of higher-and-better use (HBU) land which they believe will be sold. The entire 80K acres are currently undergoing a review by management and a third party adviser to assess value and formulate a strategic plan for the partial or full monetization of the timber assets. Aside from the aforementioned acreage, ~2,500 acres will be sold in 4Q05 for $8,500 per acre.
COMPANY DESCRIPTION
P. H. Glatfelter Company (“Glatfelter,” GLT, or “the Company”) is a paper manufacturer operating in both the specialty papers business and the long fiber and overlay business. The North American based specialty papers segment represents 62% of revenues and produces publishing paper, envelope paper, and engineered paper products including postage stamps, medical garments, playing cards, and digital inkjet applications. The Europe-based long fiber and overlay segment represents 38% of revenues and is involved in the production of primarily tea bags and coffee filters made from abaca pulp. GLT owns paper mills located in Spring Grove, Pennsylvania, Neenah, Wisconsin, Gernsbach, Germany, and Scaer, France, as well as an abaca pulp mill in the Philippines. The company also owns 80,000 acres of timberlands throughout Virginia, Delaware, and Pennsylvania.
VALUATION
Capitalization: as of September 14, 2005
($mm except per share)
Share Price 14.55
Shares Outstanding 44.00
Market Capitalization 640.20
Less: Cash 22.6
Plus: Debt 202.30
Total Enterprise Value 819.90
GLT is a “sum of the parts” story comprised of the specialty papers business, the long fiber and overlay business, and timberland assets. GLT’s North American specialty business is undergoing a restructuring in which $15-20MM in cost savings will be realized by year end 2005, positively impacting full year 2006 results. The European long fiber & overlay business faces some challenges due to the soft economy in Western Europe. At the 3Q05 conference call it is anticipated that management will announce the strategy for restructuring the European business. The strategy will entail stripping out a proportional amount of costs to that achieved in the N. America restructuring. Also, management sees growth prospects in Asia and has recently opened a sales office in China. THE DRIVER OF VALUE is the 80,000 acres of timberland Glatfelter owns that are currently undergoing an appraisal. This will lead to the sale of HBU land and potentially all timberland holdings. Based upon my analysis the Company-owned timberland is worth between $250MM or $5.70 per share to $375MM or $8.50 per share. The company has implemented sweeping cost saving initiatives and 2006 EBITDA is expected to be $100MM - at 7x the operating business is worth $700MM or $15.90 per share.
Thus, Glatfelter is worth after adding the 4Q05 land sale $21MM or $0.48 per share, plus cash of $22.6MM or $0.51 per share, and less debt of $202MM or $4.60 per share. Also, giving the Company credit for 1/3 of their over funded pension adds another $1.50 per share of value.
Valuation per share basis:
Operating business $15.90 15.90
Timber assets 5.70 8.50
4Q05 land sale 0.48 0.48
1/3 over funded pension 1.50 1.50
Cash 0.51 0.51
Debt (4.60) (4.60)
TOTAL VALUE 19.50 22.30
There are other positive value drivers to the story. First, GLT’s CAPEX is expected to run at $30-35MM which is below depreciation. Second, the Company is pursing insurance recoveries from the Fox River environmental contamination. Over the past two years GLT has received approximately $30MM in insurance recoveries and legal costs are running about $5MM per year. Third, the Company’s pension plan is over-funded by about $170MM.
OPERATING ASSETS
North American Assets:
The Company owns two assets in the United States which are known as Spring Grove (located in Spring Grove, PA) and Neenah located in (Neenah, WI). The Spring Grove facility has capacity to produce 310K tons of uncoated paper and 66K tons of coated paper. The Neenah facility has capacity to produce 125K tons of uncoated paper.
GLT implemented sweeping changes over the past three years in order to cut costs and restructure the North American operations. In 2004 GLT reduced its North American workforce by 27%. The restructuring efforts are expected to improve operating performance $15-20MM annually beginning in 2006.
The majority of domestic revenue and earnings are driven by the Spring Grove facility. The facility produces paper used in hard cover books, postage stamps, envelopes, disposable medical garments and converting papers. The Spring Grove facility produces roughly 40% of the hard cover book paper consumed in the United States. For example, Harry Potter by J.K. Rowling and 1776 by David McCullough are both printed on GLT paper. In 2004, book publishing revenues comprised $142MM or 42% of the specialty papers segment total revenue, down from 47.5% in 2003, and 54% in 2002.
Glatfelter recognizes that the book publishing business is a mature market and thus the Company has been focusing on growth within the specialty papers market. The North American specialty papers market remains robust due to the strong demand in targeted, high-value niche markets. Both selling prices and shipping volumes have increased due to new product developments as well as improvements in the sales and operations planning process. Volumes in the specialty papers segment increased 5.6% in the first half 2005.
Glatfelter’s specialty paper business produces a wide range of colors, textures and capabilities (in terms of strength and size) for conversion into envelopes. Envelopes and converting papers comprised $81MM or 24% of specialty papers revenues in 2004, up from 20.5% in 2003 and 19% in 2002. Specialty papers also produces engineered paper products such as pressure-sensitive postage stamps, disposable medical garments, playing cards, and digital imaging paper. Revenue from this sub-segment made up $110MM or 32.5% of 2004 Specialty Papers revenue, up from 30% in 2003 and 27% in 2002. The prices in this sub-segment are typically more stable than they are in less niche-specific paper markets because their technical nature allows for higher per-ton prices and requires a greater level of customer-supplier development collaboration. While many engineered products have already been developed, GLT usually engages in the development of new, high-growth products for its customers. About 60% of revenue comes from products developed within the last 5 years.
International Assets:
Glatfelter is the parent company of Schoeller & Hoesch, a wholly owned subsidiary based in Germany that specializes in tea bags, coffee pads and filters, decorative laminates, and metallized labels. Schoeller & Hoesch owns and operates two paper mills and an abaca pulp production facility. In Gernsbach, Germany the mill has annual capacity to produce 44K tons of lightweight paper and 11K tons of metalized paper. In Scaër, France the mill has annual capacity to produce 5K tons of lightweight paper. The Abaca pulp mill located in the Philippines produces 11K tons of Abaca pulp. This mill supplies substantially all of the abaca pulp requirements of the S&H paper mills. Abaca pulp can only be grown in the Philippines and Ecuador and is the integral component fiber of tea bags and coffee filters given its long fiber consistency and strength.
The Long Fiber & Overlay papers segment accounted for $205MM or 38% of revenues in 2004. Long fiber products (tea bags; coffee filters) comprise 50-55% of sales in this business segment, making GLT one of the most abundant manufacturers of Long Fiber products in the market today. There are only two other producers of long fiber products in the world and they are JR Crompton LTD and C.H. Dexter.
GLT is developing a comprehensive program designed to improve the performance of the Europe-based long fiber and overlay segment which currently faces challenges due to market softness. The goals of the restructuring program will be to improve productivity of facilities, reduce costs through improved and expanded supply-chain management strategies, and enhance new product development to pursue new market opportunities. As the European market recovers, this restructuring effort will drive sales for the long fiber and overlay business and costs are expected to be reduced in proportion to that of the North American costs saving plan.
TIMBER ASSETS
GLT owns 80,000 acres of timberlands located across Virginia, Pennsylvania, and Delaware. Exact locations and acreages are undisclosed however the Company has stated that 40,000 acres are located in Virginia, 12,000 acres in Delaware, and 28,000 acres in Pennsylvania. Not included in these numbers is an agreement GLT entered into on May 10, 2005 to sell 2,494 acres of timberland in Delaware at $8,420 per acre. This sale is expected to be completed in 4Q05. Also, in 2004 the Company sold 2,332 acres for $13K per acre.
Given the population growth in the region, the proximity to the I-95 corridor and major cities the land has become quite valuable. The Company has hired an advisor and is currently in the process of assessing the land to develop a strategy which will entail a partial monetization and could entail a full monetization of the land.
Virginia:
GLT owns approximately 40,000 total acres in Virginia. I was able to account for 14,418 acres of the total land which is located in the counties of Culpeper, Orange, and Louisa. The total value of the land in Virginia is estimated to be worth between $120MM based on $3,000 per acre and $200MM based on $5,000 per acre.
Delaware:
GLT owns approximately 12,000 total acres in Delaware. 100% of the land has been accounted for and all of the acres are located in Sussex County. The total value of the land in Delaware is estimated to be worth between $60MM based on $5,000 per acre and $90MM based on $7,500 per acre.
Pennsylvania:
GLT owns approximately 28,000 total acres in Pennsylvania. 22,850 acres have been accounted for and are spread throughout Juniata, Huntingdon, Perry, Fulton, Franklin, and York counties. The total value of the land in Pennsylvania is estimated to be worth between $70MM based on $2,500 per acre and $85MM based on $3,000 per acre.
CONCLUSION
Management recognizes the difficulty in being a smaller producer in the competitive paper and forest products industry. Importantly, management acknowledges the value the Company holds in its timber assets and has certainly indicated its willingness to sell assets. Over the next 12 months there are multiple catalysts to drive the stock price higher. First, we will see the continued divestiture of timber assets which could entail an entire sale of the timber assets. Second, the cost savings for the North American business will be recognized and management will begin restructuring the European business. Third, there is the potential for the entire sale of the Company given the recognizable assets, low debt/capital ratio, and cash flow dynamics of the business.
Catalyst
- Monetization of timber assets
- Sale of the entire Company
- Improved North American operating performance as post restructuring cost initiatives are realized
- Restructuring of the European operations to be discussed in 3Q05 conference call