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080103 Deutsche Bank Report - TIN - What remains & What is it Worth?

Deutsche Bank - Equity Research

Temple-Inland {Ticker: TIN, Closing Price: USD 20.10, Target Price: USD 31.00, Recommendation: Buy}.

* The new Temple looks like a great value

After a dramatic restructuring in 2007, a new Temple-Inland has emerged that focuses on corrugated packaging and building products.  We are maintaining our Buy rating and introducing a new target price of $31 and a new '08 EPS estimate of $1.15/share.  Our Buy rating is based on favorable valuation and a positive cyclical outlook in the corrugated packaging business.

* We value corrugated packaging at $3.5B

We estimate that '08 EBITDA for this business will be $500MM, assuming that it were an independent company.  Packaging Corp and Smurfit-Stone are two pure plays in this business and therefore represent excellent comps.  Looking at 2008 EBITDA estimates, PKG is trading at a 6.7X EV/EBITDA multiple and SSCC is trading at 7.3X. Assigning a 7.0X multiple to Temple's business gets us to an enterprise value of $3.5B.

* We value building products at $750MM

Due to the housing slump, '08 EBITDA is likely to be zero or negative.  However, this business generated $261MM in EBITDA as recently as 2006.  Looking across the cycle, we think a reasonable value for the building products division is about $750MM, 6x mid- cycle EBITDA and slightly less than 3x 2006 EBITDA.

* Valuation/risk

Our $31 price target is based on the sum of separate valuations of the Corrugated Packaging and Building Products businesses.  We value the Corrugated Packaging business at $3.5B and the Building Products business at $750MM.  Adding the two implies an EV of $4.25B and an equity value of $3.35B, or $31/share.  Key risks include momentum in the economy, US$ exchange rates, energy costs, and the housing market.