Industry Reports

Deutsche Bank Reports Summaries

080221 Deutsche Bank Report - WY TimberStar Sale

Deutsche Bank - Equity Research

Weyerhaeuser {Ticker: WY.N, Closing Price: USD 62.47, Target Price: USD 95.00, Recommendation: Buy}.

* Recent TimberStar sale suggests even higher timberland valuation

TimberStar announced the sale of 900K acres of U.S. South timberland for $1.71B, or $1,900/acre. This appears to be, by a substantial margin, the highest per acre price ever paid for a large block of U.S. South timberland and suggests even higher asset value at WY. We maintain our Buy rating on WY, primarily on asset valuation.

* What drove the valuation so high?

It certainly was not fundamentals. The deep housing slump is causing very low lumber prices and volumes, which in turn leads to lower sawlog prices. Besides the usual explanations (good historical returns, low correlation, inflation hedge, etc.), we think key factors were the weak US$ and the creative financing structure.

* Deal should prompt fresh appraisal within WY

The high valuation in this deal again raises the question of whether a public vehicle like a C-Corp or a REIT will ever maximize the value of WY's timberlands. The message in deal after deal is that private market values appear to be several EBITDA turns above public values.

* Valuation/risks

Our $95 price target is based primarily on our asset valuation. We have tempered our price target slightly to account for the cyclical pressures that are currently taking earnings significantly below normalized levels. The primary risks involve execution risk in WY's transformation strategy. WY also faces economic risk & interest rate risk, since industrial activity levels influence demand for packaging grades, and the housing market affects both real estate and wood products.