Industry Reports

Deutsche Bank Reports Summaries

080123 Deutsche Bank Report - Q3 Containerboard Quarterly

Deutsche Bank - Equity Research

* 3Q results were relatively flat

3Q operating performance was about flat at most firms -- both on a y/y and a q/q basis.  Volumes and containerboard prices were both about flat on a y/y basis.  There was some y/y lift in average box prices, but this was muted by a substantial y/y rise in OCC costs.  OCC prices rose to an average of $127/ton, a dramatic increase over the $92/ton average of 3Q06.

* 4Q seasonally weaker, but recent price hike suggests better comps ahead

Looking ahead to 4Q, results are likely to be seasonally weaker on a q/q basis but slightly better on a y/y basis. The comps should benefit from the $40/ton containerboard hike implemented in September, but we expect gains will be muted by the time required for the hike to flow through into boxes and will be partially offset by rising input costs. The biggest cost issue is OCC, which rose to $128/ton on avg, compared to $74/ton in 4Q06. Wood chip costs are also rising.

* Fundamentals still look good, but recession risk is key worry

Despite sluggish demand throughout 2007 (avg wk box vol's -1.7% YTD through Nov), supply discipline and improving trade flows are creating high operating rates and low inventories. The industry ran at 97.4% for the year, and yet inventories remain very lean by historical standards. The question is whether this dynamic can be maintained if a recession drops demand down another level.

* Industry consolidation

Weyerhaeuser continues to evaluate options for its containerboard operations. We continue to expect a merger with an independent containerboard player, with a Reverse Morris Trust structure, as we saw in the Domtar deal. We expect an announcement later in 1Q. In other news, Rock-Tenn recently announced the acquisition of Southern Container.

* Valuation/risk

We use various methods to value the stocks, including PE, book and EBITDA. Overall, paper companies and packaging companies appear to be trading within their historical norms, 1.6X book and 6.7X '08E EBITDA respectively. The primary risks involve momentum in the economy, the health of demand within key grades like containerboard and white paper, and additional energy, chemical, and freight cost inflation. Companies with significant exposure to the CN$ will suffer from the strength of that currency.