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ABH - Abitibibowater Inc.


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Here is a recent G&M write up:

 

“Clearly we’re contrarians,” says Paul Rivett, a Fairfax spokesman. He says one allure of the company is that it is trading at substantially less than book value, which was around $40 a share at the end of 2010, according to figures from company filings.

 

www.theglobeandmail.com/globe-investor/investment-ideas/abitibi-losing-proposition-or-profitable-value-play/article2022827/

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I'm surprised more people haven't written about ABH. It trades for 2/3 book and is cash flow positive after 2011 Q1. It is held by several large name investors including Fairfax, Chou Associates, and Paulson & Co. It is also Fairfax's largest holding. I'm no expert on this industry or this company for that matter but it looks incredibly cheap. Probably one of the cheapest companies I've come across in a while. You guys are all much smarter and more experienced than I am. So what am I missing or should I coattail some good value investors?

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They all got in much cheaper through the Abitibi debt.  So while there is a margin of safety, it's not nearly as good as for those who bought the bonds when they were 10-20 cts.

 

I looked at ABH but didn't really get comfortable with their turnaround strategy. I've been looking at Eacom.

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  • 1 month later...

ABH has taken a big hit today and is now trading below its price upon reemergence from bankruptcy...

 

They had $320M in EBITDA in 2010 and expect continued strong performance in 2011 and 2012 given current pricing trends and rationalized capacity.  The GS analyst estimates EBITDA of $640M for 2011. 

 

As a result of the restructuring, they reduced their debt load from US$6B to ~$900M, which equals 1.8x Net debt/EBITDA (2010).  They have a strong focus on debt reduction, as they will use some of the proceeds from the recent sale of 75% of the Ontario Hydro assets (C$300M) to redeem a portion of the outstanding debt.  2011 cash flow generation, asset sales and cash on hand are expected to completely reduce net debt by the end of 2011.

 

So with a current market cap of $2B and 0 net debt by the end of 2011, that would give us a forward multiple of 3.1x EV/EBITDA in a company with a leading market position (albeit in a declining market) and lots of financial flexibility.

 

Any thoughts on the largest position held by Fairfax and Francis Chou? 

 

 

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Hi Renkane,

 

I am unsure how you value this stock based on 1 Q of normalized results.  EPS was 0.31.  Annualized

with a Pe of 10 gives me a stock value of 12.00.  Add in the declining industry effect you mention and you get a price even lower than that. 

 

As for FFH: We know roughly how FFH came to have their shares, but not the aggregate success or failure of the holding for them.  And, it makes up 400/20000 M of FFH's total investments (2%), or 8% of their stock investments.

 

As for Chou:  He obtained his shares through the debt retructuring.  I am guessing that he picked up the bonds on the cheap when it was in Debtor in Possession with FFH.

 

I am cautious when coattailing FFH.  They have so many ways they make money out of a situation that dont apply to me, as an outside passive minority investor.  When these companies need money FFH loans it to them at extortion rates, etc. 

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As a result of the restructuring, they reduced their debt load from US$6B to ~$900M, which equals 1.8x Net debt/EBITDA (2010).  They have a strong focus on debt reduction, as they will use some of the proceeds from the recent sale of 75% of the Ontario Hydro assets (C$300M) to redeem a portion of the outstanding debt.  2011 cash flow generation, asset sales and cash on hand are expected to completely reduce net debt by the end of 2011.

 

Thanks Renkane for bringing this up.

 

When ABT went BK I remember looking at their assets. A $2.8B EV valuation seems way too cheap. Abitibi alone was probably worth a multiple of that. Could you give a fast update on what happened to the following assets during the reestructuring?

 

  • Do they still keep some of the hydroelectric assets? They were worth a lot.
  • What happened to the NAFTA litigation?
  • How many acres of timberland remain?
  • Do they still have the 50% in PanAsia Paper?

 

Thanks a lot

 

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Uccmal--Thanks for the feedback.  I used analyst forward estimates as a shortcut for the valuation.  I use analyst estimates only to initially screen companies, but do not consider them reliable.  I also use Fairfax, Chou, et al holdings as screens for potential target companies, but wouldn't piggyback without getting comfortable on my own (Fairfax recently bought additional shares at around $22). Several of my initial screens show it might be worth digging a little deeper into the story, so I am now in the process of getting more familiarized with the Company. I was wondering if other board members had any insight since there is some interest in fairfax and in pulp/forest products as well.

 

Maestro--It seems cheap to me also.  I read they settled the NAFTA claim for C$130M and know that they recently closed on the sale of 75% of its Ontario Hydro assets for C$300M.  They are still holding on to their Quebec hydro assets.  I am unfamiliar with their timberland holdings and Pan Asia holding but will let you know if I come across anything specific.

 

PS: ~7% drop today appears to have been triggered by an analyst downgrade (TD Newcrest).

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Sorry guys, I don't know the first thing about trees.

 

Just trying to wrap my head around this. Does anyone have any ideas on the following?

 

How much is their timberland worth as bare land?  What is the value of the standing timber?

 

Where is the land?  Is it affected by pine beetle or anything like that?

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Here's one stat that gets my attention:

 

ABH is currently trading at one-half book value.  If the new company can generate just an average return on equity, then the price should double from here.  The price should go down only if the company generates a very poor ROE.

 

In a capital-intensive, declining industry, perhaps that is not necessarily an appetizing price.  But consider that they just went through a massive restructuring where they shed their least desirable assets and retained their most productive, such as ones that are near ports and can export to Asia and Latin America.  Also consider that they shed much of their debt, pension obligations and other legacy issues, which presumably other players in the space still need to cope with. 

 

There are also two other hard to predict variables at play:  the value of the US dollar v. the loonie and fuel prices.  In the first quarter after bankruptcy, fuel costs were high and should not remain at that level in my opinion -- they have already started to come down.  Currency is more important and harder to predict -- for every cent the loonie goes up against the dollar, the company loses $22 million in profits.  So, if the loonie goes to 1.13 or .93, it will have an enormous effect on the company.

 

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MONTREAL, June 30, 2011 /PRNewswire/ - AbitibiBowater (NYSE: ABH) (TSX: ABH) announced today that, with the proceeds from the sale of its 75% indirect interest in ACH Limited Partnership, the Company recently redeemed approximately $270 million of its debt. With these disbursements, AbitibiBowater's total debt has been reduced to a face amount of approximately $670 million.

"These recent actions are an important milestone in AbitibiBowater's focus on reducing its debt and associated interest burden," stated Richard Garneau, President and Chief Executive Officer. "Debt reduction is a fundamental part of our strategy to reduce fixed costs and improve the Company's financial position and competitiveness."

The following three debt repayments were made during June 2011:

$94 million principal at a redemption price of 105%, together with accrued interest, of the $850 million, 10.25% senior secured notes due 2018;

$85 million principal at a redemption price of 103%, together with accrued interest, of the $850 million, 10.25% senior secured notes due 2018; and

$90 million principal at par, together with accrued interest, of the Augusta Newsprint Company promissory note - repaid in full.

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  • 5 months later...

Since FBK is now being taken out by ABH, this thread ought to be bumped, as many former FBK investors could be ABH investors going forward.

 

There has been some dissatisfaction, to say the least, about the FBK offer.  Clearly, there is a divergence of opinion on the value of ABH versus FBK, and I would like to understand ABH better, particularly with respect to the pension liabilities.

 

Question I will put to the board: does anyone have any recommendations regarding the best way to assess how the pension funding for ABH will work?  Is everything in the public filings, or is there some background material that I should read to get up to speed?  Good detail in the BK filings, for example?

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  • 2 weeks later...

Here is a recent G&M article on ABH. RBC recently reduced recommendation from 'Outperform' to 'Market Perform'. I have started reading up on ABH (again). I like that they are paying down debt and continuing to reduce costs. I wonder if ABH is not a way to play US housing turn (over next few years).

 

http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/abitibibowater-from-behemoth-to-lean-and-green/article2283877/

 

Much scares me about ABH: newsprint is a brutal business (and getting worse); competitors are not rational; cyclical business will hurt should US enter another recession in 2012; not much of a track record (only one year since exiting bankruptcy). 

 

The purchase of FBK looks good also; the price looks decent. Aquiring the Quebec mill would be great by shifting ABH business to NBSK pulp and away from newsprint. The issue with FBK is the two RBK pulp mills in the US... absolute dogs with fleas. I would expect ABH would have better opportunity than FBK mgmt to utilize in economically beneficially way or to sell. Of interest, when discussing the transaction analyst at RBC gave zero value to two US RBK mills; entire purchase price was allocated to Quebec mill.

 

At the end of the day I have not done well with turnarounds like this. Past experience tells me to run and hide. Not sure why I keep coming back. Perhaps a little like women who are attracted to bad boys??? :)

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  • 3 months later...

Well I established a position in ABH today. Yes, the business faces challenges. However, ABT looks to be in good position to benefit from the issues their competitors are facing. As well, it looks like competitors are acting rationally; one example is newsprint where prices have been steady for 18 months and capacity has been shuttered by most players. Purchasing Fibrek for $220 million would also be a solid move; if they are able to spin off the RBK mills in the US (for a few dollars) the purchase would be an even better move.

 

Recent Presentation: http://www.resolutefp.com/Investors/Presentations_and_Webcasts/

FFH Stock Purchase: http://www.gurufocus.com/news/172379/prem-watsa-buys-more-abh-as-stock-price-falls

 

ABH releases results on Tuesday May 1. My guess is they will be at the low end of expectations (which is my guess why the stock has sold off).

 

Management continues to say they want zero debt; in this business I think this is smart. They are limited to paying back $85 million per year until 2015 so it looks like they will be building their cash balance until then. Perhaps this also explains the appeal with Fibrek. They have cash on the balance sheet they can use to pay off Fibrek debt. They then can use the cash flow from the purchase to re-build the cash from now to 2015 to then pay off Resolute debt.

 

Management also looks focussed on making all remaining facilities lower cost which will pay dividends in future years.

 

I also did not realize they have the potential to be the 4th largest lumber producer (after WFT, Weyerhauser ans Canfor). At some point US housing is going to turn and this division will print money.

 

FFH continues to buy more shares; my guess is they are looking out 5 years and see great opportunity and are perfectly happy to buy now and sit and wait.

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Their main business is newsprint and newsprint is dying. Horror stories on this board about companies experiencing secular declines are many: Yellow Pages, RIM, Radio Shack, Best Buy, Sears and the list goes on and on.

 

It is now one of my "checklist" items to avoid businesses experiencing secular declines at whatever cost. If the only businesses available at reasonable price on the stock market are of this kind then one should seriously wonder about the state of the market. IMO, it is not the case today since there are many growing firms available at very attractive to nice valuations.

 

On top of that, the "window" in which an ABH can make money is always very narrow relative to the business cycle. There is always a problem it seems with the economy, energy, laws, unions, supplies, etc. Regarding their competitors, they own the market in North America and yet are not even able to sell the product at a profitable price. That should tell you something.

 

So if you like lumber, buy a true low cost lumber producer. Same if you like pulp.

 

Cardboard

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I strongly second your sentiment Cardboard.  ABH is going be dead money for a generation.  Better just to buy FFh and smooth the odds from these dogs.  There are so many better places To put money in this environment, with companies that are cheaper, and have better growth prospects.  See threads on BAC, WFC, AIG. 

 

FFH buying does not inspire me in the least.  I have watched them lose money all over the place.  They make it up on their greatest hits which gives them the 20% returns over time.  One ICG or H&R, or SD makes up for alot of dogs.

 

 

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Guys, thanks for the reality check. Forestry in 2008 was a very different animal; companies were levered big time with debt. As the business shrank they were unable to deal with the situation from a position of strength. I think there is a chance that we are on the cusp of a re-birth of sorts. Still more pain to come but my guess is ABT is an example of what we will see in the sector: low debt, with management focused on maximizing profit. This is the model of the successful lumber producers (WFT, CFP, IFP).

 

Yes, ABT is a speculative play with lots of risk. However, the upside is substantial should results and investor sentiment in the forestry sector improve.

 

ABT market cap = $1,250 million; net debt is = $250 million; EV = $1,500 million

2012 EBITDA Est = $450 million; EV/EBITDA = 3.3X

 

Given net debt is $250 million (and could be zero by YE) interest costs are minimal.

Cash taxes will be low in future years given all the tax loss carryforwards they have.

 

Yes, there are issues regarding the pension that need to be dealt with but they do have some time. Offsetting this somewhat are the assets likely hidden on the balance sheet. There will likely be lots of one time puts and takes going forward as the company focusses on some assets and sells others.

 

Looks to me that the company has a reasonable chance to generate substantial cash flow moving forward. In the past, cash flow went to debt holders; moving forward, with no debt, the cash flow should benefit shareholders. I am also assuming management makes good capital allocation decisions moving forward (having FFH involved is beneficial). Mgmt is saying the right thing; I like the price they have offered for Fibrek. So far so good but we need more time to assess management.

 

Domtar looks to me to be a good example of a well run company in the forest industry. The stock fell to $8.00 in 2008; in 2012 it will earn more that $8.00 and today trades over $90. Of interest, previous to his stint as CEO of Catalyst, CEO Garneau was VP Operations at Domtar. The point I am making is there are companies that do well in the forestry sector. My guess is ABT will be much better managed than pre-bankruptcy and has a long way to go to be considered in the same league as a Domtar.

 

Regarding ABT's core business of newsprint, yes, it looks ugly. However, I do think it is reasonable to expect more rational behaviour from North Amercian producers moving forward. Currently three of the top 5 producers are in bankruptcy protection and ABT just emerged itself. Pre-bankruptcy none of the players were able or motivated to make the hard decisions with the massive debt overhang and lack of bargaining power (with unions, governments etc). Bankruptcy allows for a fresh start. This is what we saw with ABT when they emerged from bankruptcy; capacity was shuttered and prices increased. Moving forward we will see fewer, larger players that will be profit maximizers. I expect capacity to get cut as the other producers emerge from bankruptcy and this should support higher prices (not crazy high... but high enough that investors are happy).

 

I would expect similar developments in the other categories ABT competes in. Over time, the healthy companies with cash will vacuum up the good assets of the weak players. Fewer players, more profit driven.

 

Timing: yes, this will take years to play out with lots of bumps along the way.

 

The wild card is the economy; should the US experience another recession this year then this sector will get hammered. This would also accelerate the changes happening in the industry.

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  • 2 weeks later...

After a year since the start of this thread, many things have flowed under the bridge -- not to mention the share price.  After reading the 10-K, I noticed that their pension liabilities are only discounted at 4.9% unlike many pension liabilities that are discounted in the 6-8% range.  Can H/W help??  I would assume so. 

 

Give that the book value is roughly $37, but needs to be discounted in my view -- is there value left??  Even after some heavily discount to some assets, at today's prices it seems to be very cheap.

 

Also the shareholder base has completely been eroded and will take several years to come back.  Once the bond holders liquidate their shares, the new shareholder base can be established.  In addition and if housing just returns to norms in 2014-2015, then the shareholder base should return along with some profits.

 

 

Cheers

JEast

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After a year since the start of this thread, many things have flowed under the bridge -- not to mention the share price.  After reading the 10-K, I noticed that their pension liabilities are only discounted at 4.9% unlike many pension liabilities that are discounted in the 6-8% range.  Can H/W help??  I would assume so. 

 

Give that the book value is roughly $37, but needs to be discounted in my view -- is there value left??  Even after some heavily discount to some assets, at today's prices it seems to be very cheap.

 

Also the shareholder base has completely been eroded and will take several years to come back.  Once the bond holders liquidate their shares, the new shareholder base can be established.  In addition and if housing just returns to norms in 2014-2015, then the shareholder base should return along with some profits.

 

 

Cheers

JEast

 

I've recently taken a position in this as well (though that was almost 20% ago now!). I think they just need to have staying power as others rationalize capacity (Verso, NewPage, Catalyst, Erving Paper). It's incredible how much capacity is being removed from operation. It looks like industry is getting right sized as inventories are staying flat despite large demand declines. My generaly sense is that the lumber mill production alone could be worth current EV.

 

On pension liabilities....they have incredibly old work force, so there is very little flexibility there. They are going to have large cash drains on the pension assets in the not too distant future.

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In newsprint ABT has many competitors in Europe; should the Euro continue lower it will create more challenges in their newsprint business.

 

As the industry evolves (i.e. competitors close production facilities) and the number of producers shrink (oligopoly) pricing power should improve.

 

I think another key with ABT may be US housing; when things start to improve in the US it will have a ripple effect and improve the financials of higher cost operators in Eastern Canada. I also am starting to think along the same lines as Cardboard who suggests a better way to play the turn in US housing is the low cost lumber producers (West Fraser, Canfor).

 

Perhaps a simple comparison whould be SFK. They were a pure play NBSK pulp mill and were good operators. They purchased the two US RBK mills and those two poor assets performed so poorly over the years the company was not able to profit as much from the NBSK pricing strength. Canfor Pulp, a pure NBSK play, performed wonderfully during this time.... Stick to the best managed, focussed, low cost producers (with low debt) when investing in cyclical businesses? 

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10% Repurchase Program Announced.

 

Resolute Announces Share Repurchase Program

6:14p ET May 22, 2012 (PR NewsWire) AbitibiBowater Inc., doing business as Resolute Forest Products (NYSE: ABH) (TSX: ABH), today announced that its Board of Directors has authorized the repurchase of up to 10% of the Company's common stock for an aggregate purchase price of up to US$100 million. The repurchase program will be funded using the Company's available cash.

 

"We are taking advantage of our strong financial position to act on an attractive opportunity to return cash to shareholders," said Richard Garneau, President and Chief Executive Officer. "The Company will continue to manage its capital with the utmost discipline, carefully balancing initiatives to return cash to shareholders with other considerations, such as pursuing sound capital investments and opportunities to further increase Resolute's earnings power. We are committed to enhancing shareholder value in the long term."

 

The Company is authorized to repurchase from time to time shares of its outstanding common stock on the open market or in privately negotiated transactions in the United States. The timing and amount of stock repurchases will depend on a variety of factors, including the market conditions as well as corporate and regulatory considerations. The share repurchase program may be suspended, modified or discontinued at any time and the Company has no obligation to repurchase any amount of its common stock under the program. The repurchase program has no set expiration date. The company intends to make all repurchases in compliance with applicable regulatory guidelines and to administer the plan in accordance with applicable laws, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended.

 

 

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