RFP - Resolute Forest Products Inc

[alertmeipp]

Down 10%+ after Q release. The quarter looks pretty solid to me, does the outlook spooked the market?

[txlaw]

How is it that this thread has no activity, given that both Francis Chou and HWIC have huge positions in RFP?

 

I've not done any detailed analysis of the company, and the only thing I can think of here is that they are valuing the company like a timber company, rather than a paper company.  But that's just speculation.

 

I would love to hear a detailed thesis from somebody who is invested in RFP. 

[WhoIsWarren]

Me too -- I'm all ears!

[racemize]

I presume it is because of this thread, and a lot of people were upset:

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/resolute-forest-products-commences-takeover-bid-of-fibrek/

 

Does seem worth discussing at this point though.

[Nnejad]

I'll kick start this.

 

RFP

Market cap: 1.25 B

Net debt: 350 mm

Pension deficit: 1.8 B

TOTAL: 3.4 B

 

Assets:

Lumber: ~600m on 100m EBITDA

Pulp: ~1 B for 1.7 mm tonnes of pulp post Fibrek.

Paper: ~ 1 B at $200 ton for 5 mm  tonnes

TOTAL: 2.6 B

 

Two swing factors here.

One, you have 5B plus of tax losses. This is somewhat of a stretch, but if you were to add 33% to the values above, you have an NPV of 860mm for the tax shield. Getting you to fair value.

 

Two, your pension deficit is valued at a low interest rate (I believe 4% discount rate), although this adjusts at every year end. They mentioned on their Q2 conference call that the move up in interest rates up until then would have decreased their pension deficit to 1.4B. The upward move in interest rates since then may mean it's more like 1.1B today.

 

These pension assets (6.5B) are managed by Prem & Co. Or more specifically, they selected most of the same managers as they selected for SickKids. See:

http://www.theglobeandmail.com/globe-investor/how-prem-watsa-turned-sickkids-portfolio-around/article1317596/

"The strategy has made SickKids Foundation among the best-performing foundations in North America in terms of financial returns."

 

And I guess as a last kicker - I've heard that pension surpluses can be withdrawn in Canada.

 

[Uccmal]

I think this is your detailed thread:

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/abh-abitibibowater-inc/msg107498/#msg107498

 

Secular decline versus cyclical decline?  I go with secular in which case book value is overstated.

 

 

 

[txlaw]

I'll kick start this.

 

RFP

Market cap: 1.25 B

Net debt: 350 mm

Pension deficit: 1.8 B

TOTAL: 3.4 B

 

Assets:

Lumber: ~600m on 100m EBITDA

Pulp: ~1 B for 1.7 mm tonnes of pulp post Fibrek.

Paper: ~ 1 B at $200 ton for 5 mm  tonnes

TOTAL: 2.6 B

 

Two swing factors here.

One, you have 5B plus of tax losses. This is somewhat of a stretch, but if you were to add 33% to the values above, you have an NPV of 860mm for the tax shield. Getting you to fair value.

 

Two, your pension deficit is valued at a low interest rate (I believe 4% discount rate), although this adjusts at every year end. They mentioned on their Q2 conference call that the move up in interest rates up until then would have decreased their pension deficit to 1.4B. The upward move in interest rates since then may mean it's more like 1.1B today.

 

These pension assets (6.5B) are managed by Prem & Co. Or more specifically, they selected most of the same managers as they selected for SickKids. See:

http://www.theglobeandmail.com/globe-investor/how-prem-watsa-turned-sickkids-portfolio-around/article1317596/

"The strategy has made SickKids Foundation among the best-performing foundations in North America in terms of financial returns."

 

And I guess as a last kicker - I've heard that pension surpluses can be withdrawn in Canada.

 

Cool.  Thanks for starting it off.

[txlaw]

I think this is your detailed thread:

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/abh-abitibibowater-inc/msg107498/#msg107498

 

Secular decline versus cyclical decline?  I go with secular in which case book value is overstated.

 

Maybe we should merge this thread with the ABH thread?

[Phaceliacapital]

There are also interesting comments in Chou's latest letters.

[JEast]

Follow-up to Nnejad's comments:

 

NOL are more like $4.5B and of the total about $1.8B is State & Local, so I think your NPV estimate is a little high.

 

The 2012 discount rate for US GAAP was 4.3%, so I would be cautious on being too optimistic about possible new discount assumptions.

 

Pension liabilities, H&W do not control the assets (maybe a small portion) plus the mix (stock/bond) is a standard mix due to regulations.  So I would not get too optimistic here either, but markets are up YTD.

[alertmeipp]

I also recall that RFP will also be benefited by strengthening of USD and they have some generation assets coming on line that will further lowering the cost.

[Phaceliacapital]

Apparently I am experiencing a little bit of Alzheimer, I thought Chou did a "decent" write up on RFP somewhere in his letters but as SI pointed out this is far less than what I had in mind:

 

In the semi annual of 2012:

 

http://www.chouamerica.com/pdf/063012%20Chou%20Semi%20Annual%20Report%20FINAL.pdf

 

Our portfolio is highly concentrated in a few names, such as Resolute Forest Products (formerly known as AbitibiBowater), Sears

Holdings and Overstock.com. Because of the high concentration, the net asset value of the Fund can be volatile. This volatility does

not bother us because our focus has always been on how cheap stocks are relative to their intrinsic value. In my view, they are

trading at significant discounts to their intrinsic value.

For example, Resolute Forest Products is currently priced at $10, but it has a book value of approximately $35, low debt, huge tax

loss carry forwards so it will not be paying taxes for years, and a highly capable management.

 

And in 2011 AR: http://www.choufunds.com/pdf/AR11.pdf

 

AbitibiBowater Inc.

All of our equity securities in the Chou Bond Fund came from the restructuring of debt securities;

we did not buy them directly.

The common stock of AbitibiBowater (ABH) did not do well in 2011. We received most of the

ABH shares from our holdings of Abitibi-Consolidated 15.5% when it emerged from bankruptcy on

December 9, 2010. We bought the 15.5% bonds at discounted prices between 25.5 cents and 27

cents on the dollar. When it emerged from bankruptcy, we received 4.1723 shares of ABH per $100

of bonds. With the ABH shares trading for $21.75, the value of the 15.5% bonds was equivalent to

$90.75 (4.1723 x $21.75) and at year-end 2010, this looked like a big winner. However, the stock

price went down to $14.55 on December 30, 2011, a decline that really hurt our overall

performance. In spite of this, we believe the stock is extremely cheap as it has a book value of $35,

low debt, huge tax loss carry forwards, will not be paying taxes for years, and highly capable

management. Our policy is to hold shares we get from debt restructuring when we believe them to

be undervalued.

We had two terrific years in 2009 and 2010, with gains of 42.5% and 32.7% respectively. In 2011,

we gave back some of those gains. Of course we don’t like such volatile returns, but believe 2011

was one of those years, in which, if there was a chance things wouldn’t work out, they just didn’t.

 

 

I thought there was much more, sorry!

 

 

 

 

[Alekbaylee]

Interesting analysis...

 

http://seekingalpha.com/article/1724572-forget-blackberry-watsas-resolute-forest-products-investment-gets-more-bang-for-your-buck?source=google_news

 

+ some more news :

http://www.stockhouse.com/News/Natural-Resources/2013/09/27/Resolute-Forest-Products-(T-RFP)-wants-12-hr-shift

 

 

[phil_Buffett]

Chou and Watsa both bought more in Q3

[SharperDingaan]

If everything goes right, there are limited additional charges this quarter related to restructuring. But if it goes not so right ... there is a partial shutdown, potential write downs, & their other plants get to shift additional inventory for slightly higher prices.

 

Then given that most would argue the plant is actually being wound down in stages as newsprint demand continues to fall .. why would the existing workers not fight to get the best deal possible - while they still can. ie: would it not be wiser to be shorting RFP, than going long.

 

You also have to wonder why RFP, as you could simply buy a Fortress Paper Deb (if it has to be pulp), & guarantee yourself a healthy return to maturity with minimal risk.

 

SD

 

 

 

[phil_Buffett]

sd perhaps you are right with your assumption. but something is in this RFP. Watsa and Chou have such a high conviction. It is now Chou biggest Holding. And Watsa own 30% of RFP. They see something in it

[Guest Quebec]

Good news coming for RFP on the pension funding front (computed on year-end rates)

 

http://www.cbc.ca/m/touch/news/story/1.2481857

 

"It's hard to overstate how good 2013 was for most defined benefit pension plans,"

 

"Stock markets soared, long-term interest rates rose sharply, and the Canadian dollar weakened which further magnified foreign returns."

 

"Long-term Government of Canada bond yields, a key factor in calculating the liabilities of pension plans, ended the year at 3.2 per cent, up from 2.3 per cent at the beginning of the year."

[Chalk bag]

Anyone still looking at this name? Stock has pulled back on the back of poor 1Q. Still seems like an interesting deep value to me.

[Fat Pitch]

Anyone still looking at this name? Stock has pulled back on the back of poor 1Q. Still seems like an interesting deep value to me.

 

Your right, in terms of value it looks interesting, as it trades at roughly 60% of Book Value right now (after the pullback).

However I do have a big concern. How is it going to get back to profitability?

 

I don't think that the issue was a poor Q1, sales and margins were very similar to 2012.

In 2013 they owed 513m in taxes. Putting the company in a negative EPS situation.

 

I didn't go through the annual reports, but my big question still on the table is did RFP go through the remaining Deferred Tax Assets they had on the books?

[Chalk bag]

Anyone still looking at this name? Stock has pulled back on the back of poor 1Q. Still seems like an interesting deep value to me.

 

Your right, in terms of value it looks interesting, as it trades at roughly 60% of Book Value right now (after the pullback).

However I do have a big concern. How is it going to get back to profitability?

 

I don't think that the issue was a poor Q1, sales and margins were very similar to 2012.

In 2013 they owed 513m in taxes. Putting the company in a negative EPS situation.

 

I didn't go through the annual reports, but my big question still on the table is did RFP go through the remaining Deferred Tax Assets they had on the books?

 

Fat Pitch,

 

You are right that the NOL may not be realized any time soon, hence the big Valuation allowance they took. But looking at EV/EBITDA and FCF the Co is trading at pretty decent discount vs. peers. Management bot back 50mm+ worth of stock @ around $12 and are probably ready to do it again (unlikely if without Fairfax blessing). As they migrate to wood & pulp and take EBITDA up w/ a vertically integrated, cost pass-through model, the stock could find a new multiple zipcode. P/BV everyone cites is not quite so because the assets aren't worth what they put in. ROIC is terrible on the current basis and a discount is warranted.

 

And I don't think the asset migration to Quebec & Southern US caused by the beetles is baked in at all. Puts a bottom on asset value I hope. Timber price might go a lot higher in the future and anyone that's not vertically integrated w/ rights to harvest might be at a strategic disadvantage.

 

Chalk Bag

[phil_Buffett]

I bought a stake at around 13$. Then the stock price jumps fast. I sold with a 30% gain. The stock moves on and rises 20% more. After the bad q1 and price drop iam back in.  Now i will hold it longer. With a few things done right, the stock price could move very nice.

[Chalk bag]

New blog post up about RFP. Your critique is welcomed.

http://dislocatedvalue.blogspot.com/2014/07/rfp-make-that-10-fcf-while-biz.html

 

[phil_Buffett]

New blog post up about RFP. Your critique is welcomed.

http://dislocatedvalue.blogspot.com/2014/07/rfp-make-that-10-fcf-while-biz.html

 

 

great post! thanks for that.

 

Long rfp

[tinhb]

Thanks a lot for the post :). I wonder how does the system of pension funding work. I know RFP contributes a certain amount each year but to whom? Does the money from contribution sits in the company fund or is it sent to a state pension fund? 

[Spekulatius]

RFP trades @16.5$ or 6.5x EBITDA/EV, which is not even taking into account the pension deficit. With the pension it trades in excess of 10x EBITDA/EV. This for a business that needs a lot of Capex to keep operating. Clearly at current valuations, you need much much better results going forward to make this work.