RESOLUTE FOREST PRODUCTS INC RFP
January 18, 2014 - 5:46pm EST by
rc197906
2014 2015
Price: 17.30 EPS $0.00 $0.00
Shares Out. (in M): 95 P/E 0.0x 0.0x
Market Cap (in $M): 1,641 P/FCF 0.0x 0.0x
Net Debt (in $M): 330 EBIT 0 0
TEV ($): 2,000 TEV/EBIT 0.0x 0.0x

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  • Canada
  • Paper
  • Discount to book
  • Discount to Peers

Description

Resolute Forest Products (RFP) is a $1.6Bn market cap company based in Canada that is "the largest producer of newsprint in the world, largest producer of uncoated mechanical papers in North America and biggest Canadian volume producer of wood products east of the Rockies."  Below is a brief description of each product segment.

Newsprint

Largest producer of newsprint in the world by capacity (3.1mn mt) with 11 facilities. This represents a little less than 10% of worldwide capacity.  RFP is also the largest North American producer of newsprint, with total capacity of ~2.9mn mt, or approximately 39% of total NA capacity.  ~ 41% of total newsprint shipments were to markets outside of NA.

Coated Papers

One of the largest producers of coated mechanical papers in North America, with total capacity of approximately 645,000 mt (~19% of total North American capacity). Coated papers are used in magazines, catalogs, books, retail advertising, direct mail and coupons. 

Specialty papers

RFP is the largest producer of specialty papers in North America by capacity with total capacity of ~1.3mn mt (~29% of total North American capacity). Specialty papers are used in books, retail advertising, direct mail, coupons and other commercial printing applications.

Market Pulp

Wood pulp is the most commonly used material to make paper. Pulp not converted into paper is sold as market pulp. RFP has total capacity of ~1.7mn mt (~10% of total North American capacity).  Market pulp is used to make a range of consumer products including tissue, packaging, specialty paper products, diapers and other absorbent products.

Wood products

RFP produces construction-grade lumber sold as well as bed frame components, finger joints and furring strips.

RFP was formerly known as Abitibi-Bowater (ABH) and emerged from bankruptcy at the end of 2010. ABH was formed in 2007 after a merger of Bowater and Abitibi which resulted in ABH becoming the third largest paper and pulp company in North America. Due to deceleration of demand from end markets, high fixed costs, a significant debt load, and financial crisis, the company filed for Ch. 11 in 2009. Since coming out of bankruptcy in 2010 (with help from Fairfax Financial which provided financing to ABH during bankruptcy), RFP significantly reduced leverage and closed marginal assets, reduced overhead and positioned itself to be a low cost producer in the industry. Total debt has been reduced from ~$6Bn to ~$600Mn today. As part of the restructuring, company reduced employee headcount by ~50% and reduced capacity in its newsprint and coated papers segments by ~50%. RFP reduced unproductive plants and left more efficient and strategic ones open (i.e. those close to port access with exposure to export markets).

A new management team was also brought on board after the bankruptcy. Of note is the hire of Richard Garneau, who has significant experience in the Canadian pulp and paper industry and in the newsprint industry. Garneau has very much focused on maintaining a clean balance sheet (through debt reduction, extending debt maturities, and increasing cash) and returning the company to profitability. He has stated, "...we want to go from an organization that emerged from bankruptcy to one that will be profitable and sustainable. You do what is necessary for the environment; you work with the communities on the social side, and make sure that it's viable economically in the long-term."

Since joining RFP, Garneau has focused on transforming RFP into a diversified company that is able to better handle cyclicality in the industry. His view is that a diversified portfolio along with a more value add product mix brings the potential for more stability and profitability. The company has reduced its reliance on newsprint, which continues to see declining demand in the industry, while maintaining exposure to pulp and wood products, growth markets for the company (i.e. US housing growth). 

If we compare the EBITDA breakdown of the various segments: 
2011: Newsprint (33%), coated papers (19%), specialty papers (23%), market pulp (24%) and wood products (2%).

2013E: Newsprint (27%), coated papers (9%), specialty papers (18%), market pulp (18%) and wood products (29%).

Despite decelerating volume and pricing on some segments, RFP has been able to preserve margins by improving efficiencies and reducing manufacturing costs (SG&A was cut from ~$330mn in 2008 to $150mn in 2012).  This is mainly possible due to its position as a cost leader in the industry.  This asset optimization program that started in 2011 has allowed management to operate a lean and efficient operating platform, with the key advantage that RFP is now able to compete for the highest margin ton products.  Recognizing secular decline in these industries, management has also reduced re-investment in declining industries such as newsprint and are using the cashflow generated from those segments to re-invest in higher growing segments (i.e. market pulp and wood products).    

Company also spends less capex than depreciation, which provides a better free cash flow picture than the headline net income would imply. Capex is ~50% of depreciation. Outside of maintenance capex and small re-investment opportunities, company has used free-cashflow for buybacks. In May 2012, board approved share repurchase program for up to 10% of common stock or aggregate cost of $100mn.  Through 3Q13, ABH has repurchased 5.6mn shares at a cost of $67mn.

Company is currently trading at ~5x EBITDA and at a P/B 0.6x, trading at a significant discount to industry peers despite having comparable margins and lower debt load. At ~5X EBITDA, market is not valuing the upside in the market pulp and wood products segment and is focused on the declining newsprint and paper industry, which are becoming a lower share of its EBITDA contribution.  Market is also not giving value to company’s improving operations and management team which has done a great job executing its turnaround plan over the last few years and optimizing its asset base, positioning it as a low cost producer that is able to maintain margin despite falling volume/pricing environments. 

I hold a position with the issuer such as employment, directorship, or consultancy.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

Company is currently trading at ~5x EBITDA and at a P/B 0.6x, trading at a significant discount to industry peers despite having comparable margins and lower debt load. At ~5X EBITDA, market is not valuing the upside in the market pulp and wood products segment and is focused on the declining newsprint and paper industry, which are becoming a lower share of its EBITDA contribution.  Market is also not giving value to company’s improving operations and management team which has done a great job executing its turnaround plan over the last few years and optimizing its asset base, positioning it as a low cost producer that is able to maintain margin despite falling volume/pricing environments. 
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    Description

    Resolute Forest Products (RFP) is a $1.6Bn market cap company based in Canada that is "the largest producer of newsprint in the world, largest producer of uncoated mechanical papers in North America and biggest Canadian volume producer of wood products east of the Rockies."  Below is a brief description of each product segment.

    Newsprint

    Largest producer of newsprint in the world by capacity (3.1mn mt) with 11 facilities. This represents a little less than 10% of worldwide capacity.  RFP is also the largest North American producer of newsprint, with total capacity of ~2.9mn mt, or approximately 39% of total NA capacity.  ~ 41% of total newsprint shipments were to markets outside of NA.

    Coated Papers

    One of the largest producers of coated mechanical papers in North America, with total capacity of approximately 645,000 mt (~19% of total North American capacity). Coated papers are used in magazines, catalogs, books, retail advertising, direct mail and coupons. 

    Specialty papers

    RFP is the largest producer of specialty papers in North America by capacity with total capacity of ~1.3mn mt (~29% of total North American capacity). Specialty papers are used in books, retail advertising, direct mail, coupons and other commercial printing applications.

    Market Pulp

    Wood pulp is the most commonly used material to make paper. Pulp not converted into paper is sold as market pulp. RFP has total capacity of ~1.7mn mt (~10% of total North American capacity).  Market pulp is used to make a range of consumer products including tissue, packaging, specialty paper products, diapers and other absorbent products.

    Wood products

    RFP produces construction-grade lumber sold as well as bed frame components, finger joints and furring strips.

    RFP was formerly known as Abitibi-Bowater (ABH) and emerged from bankruptcy at the end of 2010. ABH was formed in 2007 after a merger of Bowater and Abitibi which resulted in ABH becoming the third largest paper and pulp company in North America. Due to deceleration of demand from end markets, high fixed costs, a significant debt load, and financial crisis, the company filed for Ch. 11 in 2009. Since coming out of bankruptcy in 2010 (with help from Fairfax Financial which provided financing to ABH during bankruptcy), RFP significantly reduced leverage and closed marginal assets, reduced overhead and positioned itself to be a low cost producer in the industry. Total debt has been reduced from ~$6Bn to ~$600Mn today. As part of the restructuring, company reduced employee headcount by ~50% and reduced capacity in its newsprint and coated papers segments by ~50%. RFP reduced unproductive plants and left more efficient and strategic ones open (i.e. those close to port access with exposure to export markets).

    A new management team was also brought on board after the bankruptcy. Of note is the hire of Richard Garneau, who has significant experience in the Canadian pulp and paper industry and in the newsprint industry. Garneau has very much focused on maintaining a clean balance sheet (through debt reduction, extending debt maturities, and increasing cash) and returning the company to profitability. He has stated, "...we want to go from an organization that emerged from bankruptcy to one that will be profitable and sustainable. You do what is necessary for the environment; you work with the communities on the social side, and make sure that it's viable economically in the long-term."

    Since joining RFP, Garneau has focused on transforming RFP into a diversified company that is able to better handle cyclicality in the industry. His view is that a diversified portfolio along with a more value add product mix brings the potential for more stability and profitability. The company has reduced its reliance on newsprint, which continues to see declining demand in the industry, while maintaining exposure to pulp and wood products, growth markets for the company (i.e. US housing growth). 

    If we compare the EBITDA breakdown of the various segments: 
    2011: Newsprint (33%), coated papers (19%), specialty papers (23%), market pulp (24%) and wood products (2%).

    2013E: Newsprint (27%), coated papers (9%), specialty papers (18%), market pulp (18%) and wood products (29%).

    Despite decelerating volume and pricing on some segments, RFP has been able to preserve margins by improving efficiencies and reducing manufacturing costs (SG&A was cut from ~$330mn in 2008 to $150mn in 2012).  This is mainly possible due to its position as a cost leader in the industry.  This asset optimization program that started in 2011 has allowed management to operate a lean and efficient operating platform, with the key advantage that RFP is now able to compete for the highest margin ton products.  Recognizing secular decline in these industries, management has also reduced re-investment in declining industries such as newsprint and are using the cashflow generated from those segments to re-invest in higher growing segments (i.e. market pulp and wood products).    

    Company also spends less capex than depreciation, which provides a better free cash flow picture than the headline net income would imply. Capex is ~50% of depreciation. Outside of maintenance capex and small re-investment opportunities, company has used free-cashflow for buybacks. In May 2012, board approved share repurchase program for up to 10% of common stock or aggregate cost of $100mn.  Through 3Q13, ABH has repurchased 5.6mn shares at a cost of $67mn.

    Company is currently trading at ~5x EBITDA and at a P/B 0.6x, trading at a significant discount to industry peers despite having comparable margins and lower debt load. At ~5X EBITDA, market is not valuing the upside in the market pulp and wood products segment and is focused on the declining newsprint and paper industry, which are becoming a lower share of its EBITDA contribution.  Market is also not giving value to company’s improving operations and management team which has done a great job executing its turnaround plan over the last few years and optimizing its asset base, positioning it as a low cost producer that is able to maintain margin despite falling volume/pricing environments. 

    I hold a position with the issuer such as employment, directorship, or consultancy.
    Neither I nor others I advise hold a material investment in the issuer's securities.

    Catalyst

    Company is currently trading at ~5x EBITDA and at a P/B 0.6x, trading at a significant discount to industry peers despite having comparable margins and lower debt load. At ~5X EBITDA, market is not valuing the upside in the market pulp and wood products segment and is focused on the declining newsprint and paper industry, which are becoming a lower share of its EBITDA contribution.  Market is also not giving value to company’s improving operations and management team which has done a great job executing its turnaround plan over the last few years and optimizing its asset base, positioning it as a low cost producer that is able to maintain margin despite falling volume/pricing environments. 
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