SFK Q3-2009 Earnings

[SharperDingaan]

 

Myth: A scan through the last years worth of SFK threads, & the Sedar AIF, will give you a fairly good background. Valuation is in the eye of the beholder.

 

SD

[lessthaniv]

If you search the threads there is some good info.

Valuation?

North of here!

 

<IV

[Myth465]

aw you guys are making me work. I will look into it this weekend. When something is trading at a $1 and people are saying they wouldnt sell for less than $10 its tough not to get interested.

[FFHWatcher]

aw you guys are making me work. I will look into it this weekend. When something is trading at a $1 and people are saying they wouldn't sell for less than $10 its tough not to get interested.

 

I found their AIF the best summary of their business.  If my memory serves me correctly, they have spent somewhere in the neighborhood of >$750M to buy up these assets and create SFK.  Market value of 90m units x $1. = $90M + ($150 LT Debt + $50M in debentures)

http://www.sfk.ca/EN/docs/NA/20081231_Annual_Information_Form_.pdf

 

It is certainly difficult looking at their 2008 numbers and trying to figure out how this company can have normalized earnings that justify a $500M ($5 per unit) market valuation, let alone ($10/unit) $1B !!!  If you look back to 2006 and 2007 where they had EBITDA of $40-60M, you can see that the potential is there.  If you start to consider the assets and low relative debt, there certainly seems like there is a lot more value than $100-200M there, especially with the $750M+ that they have invested in the 3 mills.  I would have to assume that as a whole, investors have to be considering whether the demand destruction is permanent or temporary.  If the demand for pulp is permanently reduced, than the worst case scenario is that their assets are worth way less (ie. 50% less?) than what they paid for them.  How valuable are assets that, regardless of how efficient of a business you have, you can't even make 1-2% margins when they used to be making in excess of 10% margins.  Are 5-10% margins possible?  Are the assets valuable enough that in a liquidation/sale of the company, can they fetch $300M net of all costs associated with such a sale?  $300M would provide $200M for debt/debentures plus $1. per common shareholder and wouldn't put any value on the business.  That is my quick take but more recently, they have a black liquor subsidy issue, revenue from selling power back to Quebec, Cdn/US$ currency issues as well as a significant increase in the pricing of NBSK in the past few months. 

Can the value destruction here be almost entirely traced back to the rapid fall in the NBSK pricing, NBSK demand/supply issue and the US$ currency issues?

 

I do own shares but I am still in the process of narrowing down what a reasonable valuation is. More than my $0.65 cost.  Maybe between $2 and $5. as an estimate  ;)  It would seem that $500M seems like a lot for a company that is in a very fragile industry.  It would be frustrating to be in an industry where the vast majority of your success or failure depends on several things that are totally out of your control.  I would narrow it down to this as to why I don't have a larger position here, as well as my inability to confidently see absolute value. 

[oldye]

Hey FFHwatcher, you're trying to figure out what you're paying for the company using historic information, not a good way to go about it. By the end of Q2, they'll have enough cash to pay off the debenture.  So even if you assume net working capital(except cash) is worthless, at todays prices you are paying roughly 250 million dollars for 3 mills.  Nobody knows what  pulp prices will be tomorrow let alone a year from now, if the U.S government decides to spend another 8 billion dollars subsidizing U.S producers they'll probably trade back at 30-40 cents again.

 

Consumption of paper per capita in India is still 1/6 of that of China that is only 1/10 of the amount of paper we consumer in the States.  Thats roughly 2.5 billion people that are going to become very wealthy over the next half century.  I'm betting that they use more paper than they do now. 

[SharperDingaan]

 

FFHWatcher: The economics are really more comparable to a drilling company; feast for a period when the commodity is booming & starve when it isn’t. The multiple moves with position in the cycle, industry herding, and the pace of investor turnover from value to momentum. Most would top it out at roughly the directly comparable CFX cap of 346/92M (3.75/Unit).

 

To get more they would effectively need to merge, & do it at a price that also reduces debt ($4.90 for the debs). Were it CFX there would be no tax hit, CFX could make higher distributions, & the CFX cap would rise; were the cap to rise 106M (31%) to 452, SFK would top out at 4.91 (452/92) & the 47M+ of debs would convert to equity. If there’s a 10% (35M) merger premium & a minimum 25M in distributable SFK cash, we’re pretty assured of conversion.

 

Both companies would get more if they sold to a new entity, & that entity used the consolidation/savings to change the capital structure. Given the players involved, & that both entities have to come out of the trust this year, fine minds may well come up with something.   

 

Speculation at this point, but it would seem fairly likely that 5.00/unit is quite doable. The real question is whether it will actually occur or not.

 

SD 

 

[Guest Dazel]

In an earlier post I mentioned a "recylcle trade" where those that have done extrememely well in Canfor pulp would take porfits and recycle them into the cheap SFK pulp shares...whether this is happenning right now or not (canfor down 2% and sfk up 14% yesterday) I do not know.

However, adding to SD's point in the last post...Canfor essentially could ..do the same things as a corp...by buying out SFK with their shares. Thye have had an incredible move in their shares where as SFK is depressed.

 

Here are the players...ownership profiles off the top of my head

Canfor pulp is 50% owned by Canfor corp.

Canfor ownership Mackenzie 20%, Jim Pattison, 30%, Jarioslowsky Fraser 20%

 

SFK PULP

Fairfax 20%, Mackenzie 20% (Mackenzie may have trimmed where as Fairfax has not since the last proxy)

 

Fairfax owns a big stake in West Fraser and Abitibi

 

Marty Whitman  has also shown great interest in the industry over the last several years....

 

SD may be correct in his old US steel type scenario because the players could do it over a cup of coffee. All of the stakeholders are Value guys and they all know each other...They have all made a living on depressed pricing...interesting...

 

If you combined a number of these companies you would effectively be using government money to build out their new green facilities bringing capex down significantly over the next number of years which would protect you until the cycle turns for the other lumber operations...consoildation will cut their costs enormously.

 

As SD stated this is speculation on these events...the SFK asset it self is what the protection is and everyone need to have their own number to feel comfortable.

 

disclosure we are long SFK..

Dazel.

[cwericb]

SFK will release its 2009 fourth quarter and year-end results after market hours on Wednesday, February 24th, 2010