FORTRESS PAPER
LIMITED
Fortress Paper (TSX:
FTP) is an international producer of security 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 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
wallpaper is declining, these markets are still experiencing
growth.
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.
After poring through the IPO prospectus we discovered that
the fire insurance value of the Landqart Mill 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 almost CAD $200 million. The Dresden 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. 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.
KANSAS CITY LIFE
INSURANCE COMPANY
Now in its 112th year,
Kansas City Life Insurance Company (KCLI) has over $31
billion of policies in force and over 500,000 policyholders.
Through its sales force of over 2,000 general agents, KCLI
offers traditional, interest sensitive, and variable life
and annuity insurance products in 48 states including the
District of Columbia.
KCLI is essentially a
family-run business that is managed with a long-term focus
in mind. R. Philip Bixby, a fourth generation member of the
founding family, is the Company’s current Chairman and CEO.
As a group, the Bixby family currently owns over 60% of
KCLI’s shares. Another 10% is held by other insiders and 6%
is owned by the company’s employees. This leaves just 24%,
or roughly 2.5 million shares in the public float. Trading
in the stock is therefore relatively thin and this has
historically led to periods of share price volatility and
undervaluation.
To ensure its
longevity, KCLI maintains a strong capital position and
employs a conservative investment philosophy. It carries
more reserves (cash put aside to pay benefits) than is
required and has just $14 million of debt. During the first
quarter of the year, KCLI returned some of the excess
liquidity to shareholders in the form of a $2 per share
special dividend. This one time payment was in addition to
the company’s regular quarterly dividend of $0.27/share.
With a market value of
just under $600 million, KCLI currently trades at a 16%
discount to our adjusted book value calculation of around
$699 million or $59 per share. As a measure of comparison,
most public life insurers trade between 2 to 2 ˝ times book
value. On August 17th, KCLI announced a 17% increase in
second quarter earnings. The Company benefited from higher
annuity sales and a lower mortality rate. If these trends
persist, we expect the market to eventually close the gap
between KCLI’s book value and its undervalued stock price.
On a final note, with
its strong regional presence, experienced sales force and
strong capital position, KCLI could make an attractive
acquisition for a larger insurer. In addition, given the
recent devaluation of the U.S. dollar, KCLI could be
catching the attention of potential foreign suitors. We
believe that in the event of a sale, KCLI would be worth
significantly more than its current market value. Of course
the final decision would rest with the Bixby’s, who may
prefer to maintain the status quo i.e. - keep it in the
family. On the other hand, if a premium offer was put
forward, the Bixby’s might consider monetizing their shares
and diversifying the family fortune.
