Value Library

The following is an excerpt from the ABC Perspective - October 2006 - Pg. 3

NORBORD INCORPORATED

Times of market volatility, uncertainty and even fear typically offer the greatest opportunity to value investors. The US housing slowdown has allowed us to purchase perhaps the highest-quality, best-managed, lowest-cost oriented strand board (OSB) producer in North America, Norbord Incorporated.

The US housing sector has taken a turn for the worse over the course of the summer. According to the US Commerce Department, housing starts declined 2.5% in July to 1.795 million units. Building permits declined 6.5% in July to an annual rate of 1.747 million units. The National Association of Home Builders said rising interest rates, falling affordability and a pullout by speculators who “were a major factor behind the unsustainable pace of new home sales last year” caused the correction.

The weakness in the housing market has obviously impacted the selling price of Norbord’s primary product, OSB. Currently, North Central 7/16-inch OSB changes hands at US$170 per thousand square feet compared to US$365 per thousand square feet last year. After touching US$155 per thousand square feet just a few weeks ago, we believe that the commodity has likely bottomed.

With approximately two thirds of its assets in the United States, Norbord reported huge financial results over the past two years. The Company generated a return on equity of 47% in 2004 and 46% in 2005. This exceptional performance allowed the Company to maintain a solid balance sheet, pay a special dividend of CDN$1.00 per share on three separate occasions and pay a regular annual dividend of CDN$0.40 per share.

Given the slowdown in the US housing market and the decline in OSB prices it would be unrealistic to expect these results to be repeated in the near term. However, we calculate that the replacement value of the Company’s assets could range between $300 and $350 per thousand square feet of capacity. With approximately 6 billion square feet of OSB, MDF and particle board capacity, Norbord’s assets could be worth $11.50 to $13.50 per share.

Although we never bank on a takeover offer, macroeconomic factors have pushed Norbord below replacement cost. The Company’s largest minority owner, Brookfield Asset Management is focused on real estate, power and infrastructure assets. It would be reasonable to expect that, at the right price, Brookfield would look to monetize their stake. Importantly, several potential buyers with the financial wherewithal and strategic interest exist. Downside is likely limited and the 4.7% dividend is an attractive reason to hold the stock through the trough of the cycle.

SEASPAN CORP

Seaspan is a Hong-Kong based company which owns 17 containerships and has contracted to add another 24 over the next three years. Its current fleet consists of 15 vessels with the capacity to carry 4250 TEU (twenty foot equivalent) containers and two which can accommodate 8500 TEUs.

In July 2005 Seaspan announced plans to go public via an IPO. In August, the company made a stop in Toronto to tell its story to potential investors. Although we were not familiar with the company, or its business model, we decided to attend the presentation with an open mind. After listening to Seaspan’s CEO Gerry Wang and CFO Kevin Kennedy, it became apparent that Seaspan’s business strategy was not only very simple, but stood to benefit from the explosive growth taking place in global trade between China and the rest of the world. Upon further research we determined that the shares looked very undervalued at $21. Ultimately, we purchased Seaspan for our ABC funds.

In a nutshell, Seaspan acquires or contracts to have built some of the largest containerships in the world. These ships are capable of carrying between 4250 and 8500 TEU containers. To put this into perspective, an 8500 TEU vessel costs over $100 million to build and is over 1000 feet long. This is the equivalent of three and a half football fields. Seaspan then leases these ships out to well-established liner operators under long-term fixed-rate charters.

Given the fixed rate, long term nature of its charters, Seaspan enjoys a highly predictable, steady stream of cash flow. This year, it will pay out approximately 85% or $1.70 per share to shareholders as dividends. Based on its current share price of around $22, this represents an attractive yield of 7.7%. Further, as Seaspan acquires or contracts to build more ships in the coming years, we expect this dividend to grow. In fact, with 24 vessels coming on line over the next 3 years, we believe Seaspan will have the capacity to pay a dividend of $2.25 per share by 2008.

It should also be noted that as net asset value buyers, we calculate that Seaspan is currently trading below the replacement value of its fleet. The current cost to build a containership runs at approximately $17,000 per TEU. At this level, Seaspan’s fleet would be valued at close to $1.5 billion. This results in an NAV per share of approximately $32, a 45% premium to its current price. Given the growth in Seaspan’s fleet and the successful execution of its business strategy, we feel the announcement of a dividend increase and recognition of its discount to NAV could eventually result in meaningful share price appreciation.

Irwin A. Michael, CFA