Industry Reports

Deutsche Bank Reports Summaries

080212 Deutsche Bank Report - AbitibiBowater Snowflake Sale

Deutsche Bank - Equity Research

AbitibiBowater {Ticker: ABH, Closing Price: USD 21.11, Target Price: USD 29.00, Recommendation: Hold}.

* ABH sells Snowflake, Arizona newsprint mill

While the sale of this mill is no surprise, we find the $161MM transaction price disappointingly low, given the reported quality & cashflows of the mill.  We think this may be the result of a very limited pool of buyers for the mill.  Our Hold rating is based on a balancing of rising pulp & paper prices against weak lumber markets and a strong C$.

* Deal looks very inexpensive on a cost/ton basis

Assuming about $10MM of value for a short-line railroad which was included, the deal values the mill's 375K mtons of annual capacity at $151MM.  This works out to just $403/mtpy.  This is at the extreme low end of historical transactions, with the high end of deals done at 4x this amount per ton.  Indeed, Abitibi's acquisition of Donohue in 2000 was done at $1,570/mtpy.

* Deal also looks cheap on an EV/EBITDA basis

$161MM represents just 5.4x LTM EBITDA of $30MM, even though LTM represents a cyclical trough for the industry.  In 2006, Snowflake generated $58MM in EBITDA, suggesting just a 2.8x multiple on that number.  Given how unsustainably low margins have been in recent quarters, we think that results in the future are more likely to resemble 2006 than LTM as of September 2007.

* Valuation/risks

Our $29 price target is derived from our estimate of Normalized conditions, which we think the company will reach in 3 years.  We estimate that ABH will generate $275MM/year in free cash flow, place an 8x multiple on this, and discount the result back two years.  Downside risks include the continued decline in newsprint demand, a weakening economy, and continued strengthening of the C$.  Upside risks include capacity rationalization leading to higher prices, and improving trade flows.