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Abitibi: Losing proposition or profitable value play? Add to ...

Abitibibowater Inc. claims that after a nearly two-year hiatus in bankruptcy protection, it has become a lean, mean, profit machine.

Investors will get an indication on Tuesday, when the forest products giant releases first-quarter results, whether that’s true, or whether there will be more pain in store for them.

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Analysts, as usual, are optimistic, and believe that the quarter’s results and those following later this year will back the company’s view that it’s on the path to recovery. All eight who follow Abitibi rate it “buy,” according to Bloomberg.

But Abitibi has had a history of delivering disappointment. It tumbled into bankruptcy in April, 2009, because of sagging demand for newsprint, one of its biggest products, and the weight of its massive $6.5-billion (U.S.) in debt.

Those unlucky enough to own stock in the lumbering forest products company at the time of the bankruptcy were totally wiped out. Unsecured creditors lost more than half their money. Most current shareholders are former debt holders who received stock as compensation for the securities they owned.

But the bankruptcy-induced overhaul has raised the possibility that Abitibi, often thought of as a losing proposition because of its big exposure to forestry, may be a value play.

The new shareholders list makes interesting reading, and suggests some savvy investors back the value-play idea.

Fairfax Financial Holdings , the insurance company run by Prem Watsa, is Abitibi’s largest shareholder. Other big owners, according to regulatory filings compiled by Bloomberg, include Chou Associates, headed by noted Toronto-based value investor Francis Chou, and Paulson & Co., the New York hedge fund that snagged billions by correctly playing the U.S. mortgage market collapse.

“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.

The calculations used to pay off unsecured creditors during bankruptcy valued the shares at about $25 (U.S.), indicating that retail investors can now pick up stock at prices close to those negotiated by sophisticated institutions.

In its investment pitches to analysts, Abitibi has been arguing that cost-cutting has remade the company into an extremely competitive player.

The conversion of much of its debt into new stock has left it with an easily managed debt load of only $850-million, which the company has pledged to further reduce from proceeds of the recent sale of Ontario hydro power assets. The transformation of debt has cut its annual interest bill by $500-million.

The company has also chopped staff levels by 39 per cent, reduced newsprint capacity by 41 per cent and slashed corporate overhead expenses by 50 per cent. In all, the company trimmed $880-million in fixed costs, significant against its $4.7-billion in revenue last year. To further enhance profitability, the company has selected its most marginal mills for closure, leaving it with its best cash generators.

If hacking away at costs were a guarantee to high profitability, Abitibi shareholders wouldn’t have any worries.

But there are big knocks against any company in the forestry sector. Due to the migration of newspaper readers to the Internet, North American newsprint consumption is dropping at a rate of about 5 per cent yearly. That’s a worrisome trend for Abitibi, producer of nearly one out of every 10 pages of newspaper read on the planet.

The company counters that only half its newsprint is sold in North America, with the other half bound for destinations such as India and Latin America, where demand is still growing. Abitibi has also reduced its dependence on newsprint to about 38 per cent of output and thinks the current rate of consumption decline is manageable.

“If you look at the new company [output]split, there is far less exposure to newsprint than there was,” says Abitibi vice-president Seth Kursman.

The paper industry as a whole has been responding to the decline in newsprint by idling capacity, a move that over the past year has led to upward pressure on paper prices, even in the face of declining sales.

Lumber markets are also down because of the U.S. housing slump, another negative.

Abitibi does make pulp, the one hot spot in the forestry sector due to surging demand for products such as tissue paper, but it accounts for only about 16 per cent of the output.

Consensus earnings for the first quarter are 40 cents a share. There are some concerns that the high value of the Canadian dollar will affect results, but this is expected to be offset by the cost-cutting.

Analysts have been projecting the company may be able to make more than $3 a share next year, giving it a reasonable price-earnings multiple of more than seven on forward-looking earnings.

Key numbers at a glance

Mean analyst EPS estimate for 2011: $2.79 (U.S.)

Mean analyst EPS estimate for 2012: $3.60

Average target price: $34.13 (Canadian)

52-week high: $30.10

52-week low: $21.73

Forward price-earnings ratio: 7.42

Analyst ratings: Eight “buy”; zero “hold” or “sell”

Market capitalization: $1.49-billion



Source: Bloomberg, Globe Investor

 
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