|
| Fortress Paper Ltd. (TSX:FTP) |
|
 |
|
|
 |
 |
|
|
| ABOUT THE COMPANY |
|
Fortress Paper (TSX: FTP) is an international producer of security and specialty papers and wallpaper base. The Company’s Landqart Mill in Switzerland produces security papers, which includes paper currency, passports, visas, cheques, share certificates and lottery tickets. The Landqart Mill has been the sole provider of banknote paper for the Swiss currency since 1979 and is one of only nine authorized suppliers of various denominations of the Euro currency. The Company’s Dresden Mill in Germany produces primarily non-woven wallpaper base that is sold to Eastern Europe and the former Soviet Union. Although global demand for wall paper is declining, these markets are experiencing growth, especially in the non-woven segment.
|
|
 |
|
|
| FINANCIAL DATA |
| |
2005 |
2006 |
2007 |
| Earnings per Share ($) |
|
|
0.76 |
| Price to Earnings (times) |
|
|
9.87 |
| Dividend ($) |
|
|
0.00 |
| Dividend Yield (%) |
|
|
0.00 |
| Book Value ($) |
|
|
5.85 |
| Price to Book Value (times) |
|
|
1.28 |
|
|
|
| PRICE GRAPH |
 |
|
 |
|
|
| WHY ABC FUNDS BOUGHT THIS COMPANY |
|
Fortress Paper became a TSX-listed Company on June 28,
2007, after purchasing the Landqart Mill and the Dresden Mill from Mercer
International Incorporated. Mercer, a European softwood and kraft pulp producer
that trades on the NASDAQ (MERC) and the TSX (MRI.u), divested the mills to
focus on its pulp business. A Canadian entrepreneur, Chad Wasilenkoff, reviewed
the assets, conducted due diligence and negotiated the transaction. Mr.
Wasilenkoff then installed experienced European management, led by Dr. Alfonso
Ciotola as Chief Operating Officer and Erich Sulser as Chief Financial Officer.
We believe that Fortress Paper is a net asset value story, where the replacement
value of the two mills and the related equipment is well above the Company’s
current market capitalization. The Landqart Mill is situated in the town of
Landquart, 100 kilometres east of Zurich in the scenic Swiss Alps. After poring
through the initial public offering prospectus we discovered that the fire
insurance value of the property was CHF (Swiss Francs) 66.5 million for the
building and CHF 163 million for the inventory and equipment. At the current
exchange rate this totals approximately CAD $200 million.
The Dresden Mill is located in the town of Heidenau, 12 kilometres south of
Dresden on the Elbe River. The mill has total capacity of 36,000 tonnes and a
12,000 tonne machine costs approximately EUR 30 million. Therefore the total
replacement value of three 12,000 tonne machines is EUR 90 million or CAD $125
million. Additionally, the Dresden complex includes land, a hydroelectric plant
and a water treatment facility, which were appraised at CAD $50 to CAD $100
million combined.
Putting all of the pieces together, we believe that the Company’s assets are
worth between CAD $375 and CAD $425 million compared to the current market
capitalization of only CAD $86 million. We are not suggesting that the stock
should trade at replacement value, but we believe that a 75% discount to net
asset value is excessive for assets that are both cash flow positive and
profitable.
On August 14, Fortress released second quarter results that supported our net
asset value analysis. Reported sales of $35.4 million were down from $38.3
million in the prior quarter due to foreign exchange and the timing of
shipments. However, EBITDA improved to $4.3 million from $2.4 million in the
first quarter of 2007. Similarly, net income grew to $1.7 million from $1.1
million in the first quarter. To be fair, we need to adjust the first quarter
net income to reflect a one-time sale by prior management, which had a negative
impact of approximately $0.4 million. Excluding this item, net income still grew
almost 14% quarter over quarter.
Based on the number of shares outstanding post-IPO, Fortress earned $0.17 per
basic share and $0.16 per fully diluted share in its first quarter as a public
entity. Annualized and ignoring any additional sequential growth through the
balance of the year, the stock is trading at approximately twelve times
earnings. Looking at the Company’s historic results, net income grew to $1.8
million in 2006 from $1.5 million in 2005. Based on a 20% growth rate,
consistent with management’s outlook, we believe that Fortress could trade at 20
times earnings. This implies a potential valuation range of $12.80 to $15.00
over the course of the next twelve to eighteen months.
We believe that Fortress Paper is a deep value story that is under-followed and
accordingly, under-valued. The shares have been thinly traded post-IPO and have
been quite volatile, which is perhaps unsurprising given the general market
conditions. However, Fortress is an intriguing small-capitalization story, with
solid net asset value support and potentially decent earnings growth going
forward. Interestingly, with the TSX listing, Fortress is positioned to bid on
contracts to print the Canadian currency in the near future. We plan to
patiently hold the stock over the course of the next few years and hope to be
well rewarded.
ABC Funds
September 28, 2007 |
|
 |
|
|
| UPDATES |
| March 14, 2008
The markets, and shares of Fortress Paper, have been extremely volatile since our initial comment on the Company. Investors have fled to safety and have abandoned small-cap, under-followed, deep-value securities. However, we are confident in the Fortress Paper story and recent results have confirmed our investment thesis, despite the present market price of Fortress.
Fortress Paper has now reported three quarters of financial and operating results as a public entity. On the surface, the numbers appear volatile, so we feel the need to provide some colour to the results. In November, Fortress reported third quarter revenue of $34.1 million while earning only $0.02 per share. This compares to revenue of $35.4 million and earnings of $0.17 per share in the second quarter of 2007. These results may have caught the market by surprise since they appeared to weaken sequentially. However, this temporary dip in earnings should have been anticipated. Management had been clear that downtime would be taken in the quarter in order to perform scheduled maintenance and upgrade the mills to increase higher margin capacity using the IPO proceeds. Consequently, the results rebounded strongly in the fourth quarter of the year, with sales of $37.5 million and earnings of $0.22 per share. For the year, Fortress reported impressive results, with sales of $145.3 million, EBITDA of $13.6 million and net income of $0.76 per share.
At the current price of approximately $7.50 per share and a total market capitalization of approximately $75 million, the shares are cheap. The discount to replacement value of the Landqart and Dresden mills, we believe, is excessive for a Company that is both cash flow positive and earning money. Trading at only 5.5 times EBITDA and below 10 times earnings, the market has placed forestry sector multiples on this Company. However, we suggest that it is more appropriate to use a high tech security multiple instead. Fortress operates in a highly specialized industry, with impressive research and development capabilities related to the development of the latest and most advanced anti-counterfeiting features. Should a multiple re-rating occur and/or the Company is discovered by the market, we believe that the shares could trade in a range between $10 and $12 per share in the context of a 12 to 18 month period.
|
|
|
 |
|
|
| INVESTOR RELATIONS CONTACT INFORMATION |
|
|
|
 |
|
|
| LINKS TO OTHER INFORMATION |
| Quotes |
News |
Profile |
Filings |
|
|
|
 |
|
|
|
|
|
|