RFP - Resolute Forest Products Inc

[Chalk bag]

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?

 

Tinhb, I think it's a great question for further due diligence. If anyone has answers to the Q I'd be all ears.

[Chalk bag]

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.

 

TTM EBITDA had been quite poor due to the weather, I think for the current set of assets, a more normal run-rate would be around 350-400 without hiccups, which brings the valuation to around 4.5-5x. Historically its lowest had been @ 4x and also that's when mgmt was buying back stock, so that gives me some comfort. Pension is an issue, but I think if one can't entrust Prem to run the thing or one believes interest rate has further to drop,  there are probably bigger problems to be had. If you read my post I have went through it at length. The way I see it is, run the pension for 2 more years and w/ 1% rise in rates the problem goes away entirely.

 

CapEx is certainly a problem. Think they are directing it to pulp and sawmills where the pricing & growth are present. Hopefully the ROIC there is a good 2-3 years out. I do buy the integrated model though.

 

After all, not a whole lot of catalyst and a mediocre business at best. But I think if wood prices soars, or management gets creative w/ the newsprint asset (ie MLP it like Perry suggests), there's a lot of value to be had. Massive FCF a few years out too.

 

On the MLP point, I think it's highly doable given the distress (low multiples), structure (top 5 controls 80% of US capacity), and RFP's nature (80%+ virgin fiber so it will qualify). They can probably explore this option a few years out once the NOLs are used, or meanwhile they could even get taken out for all of the above reasons.

[benhacker]

Chalk Bag, do you have any updated thoughts here?

[kfh227]

This stock keeps going up and down like a yo-yo.  it's up near the top again.  Should I Sell?  I'm using margin so I am thinking about unloading some of this position.

[zenith]

Q1 sales fell 9 percent

[JEast]

A little surprised that none of our Canadian board members have commented on RFP recently.

 

The take on RFP for the last few years has been – operating in a tough business in the mist of a secular declining sector with a lack of big-firm coverage.  After returning from the most recent annual meeting, the new take should probable be updated to – in a brutal secular declining business with zero coverage!  I was the only finance guy in the entire room and was out numbered 4-to-1 by Greenpeace.  During the Q&A, not one (1) single business question, seriously, not one question was asked but several pontifications were made.

 

Anyway, within the last couple of weeks the company has made a couple of major announcements.  First was for a newly announced credit line agreement at a lower rate, helps a little, but I think the bigger point is that they were able to extend the term to 2020.  Then an announcement of a massive addition to the Calhoun project in the amount of $270m for a tissue/paper towels product line.  This is on top of the already $100m investment at Calhoun that is near completion from a few years ago.  And third, an additional $50m buyback ($83m total).

 

RFP’s balance sheet is a little complicated with the uncertainty of the pension liability.  However, I look at the pension issue as a red herring as in the distracting kind.  It is important, but not the real issue in my view.  There are only really two (2) issues as I see it, which are 1) will the company just continue to burn cash flow and possibly go bankrupt with the brutal secular decline in newsprint, or 2) earn at least average margins on timber and pulp going forward?  No illusion that this is not a great business, but just average returns on timber and pulp at the current stock prices makes this opportunity look interesting.

 

If the company cannot earn a profit, then the current price is probably at fair value.  If they can earn a profit semi-consistently, then they will not be paying taxes for many years – big if though.  Toss in an additional if, if they can earn an average profit on timber and pulp then the NOLs become very interesting and possibly worth more to another owner to shield consistent profits.

 

Back to the pension.  Due to Canadian law with the Canadian 10-year rate of 1.70% at yearend, the company is forced to pay extra into the pension fund account (the company’s pension account).  As such with this very low rate, it makes the solvency of the account to look very deficient (hence the extra payments).  However, at least the governments of Ontario and Quebec recognize this and cash outlays will be regulated at roughly $150m or so going into the pension account for 2015.  Even though per GAAP, they are discounting at around 4.0%.  Given the current state of the company’s pension account (around $5B), a 50bp move in rates changes the liability around ±$350m on an annual basis.  Could the pension be overfunded in 3-5 years if the 10-year goes back to 4%?  Is this an indirect way to short fixed income?  You be the judge.  (Side note: Hamblin/Watsa does not manage/advise on any of the assets)

 

Disclosure: I have conflicts of interest and biases, as I am long the equity.  Looks like a heads you win, tails you don’t lose too much below $12.

[benhacker]

Thanks JEast... didn't see that it had dropped so much recently.

 

It's always darkest, and quietest on message boards, before the dawn. :)

[finetrader]

I would forget about the NOL and concentrate on FCF.

 

This company consistently has much higher depreciation than capex. And since it is a poor business, it will be very hard to make consistent pre tax accounting profit.

 

In it's current structure, I don't believe Resolute will be able to use NOL.

[jason]

I havent followed this too much but I know its a heavy FF holding.  Anyone with any details on the recent events and huge drop in price?  Down over 10% today alone.

[watsa_is_a_randian_hero]

Has anyone looked at the 5.875 May 2023's? Cusip 76117WAB5

 

Trading at 80 cents on the dollar now; 9.75% yield. 

 

A lot of leverage in this guy.  What does Prem see in this?  You think he'll infuse more equity (which would be supportive of the bonds listed above)?

[zenith]

a large block today of 6.95M shares at $6.70 went off today, and i would bet that it was Steelhead Partners that sold as they have 6.95M shares as of Sep 30th, 2015 and they sold 2M shares the prior quarter. The stock than bottomed after that trade and closed positive to $7.50. Someone bought that block of shares and we will soon find out. Their is 89.3M shares outstanding so the trade was 7.8% of that total.

[benhacker]

$1m face of debt was blown out today, 15% below last on no news.  Stock was inline / strong for sector.

 

I assume this was a full on liquidation.

[Uccmal]

$1m face of debt was blown out today, 15% below last on no news.  Stock was inline / strong for sector.

 

I assume this was a full on liquidation.

 

Toronto Star announced it was closing its Tor.  printing plant today.  The Sat. and Sun. star papers were so large 10 years ago, you could have made an entire tree out of 40 copies (I am not exaggerating). 

[zenith]

earnings

http://resolutefp.mediaroom.com/index.php?s=28238&item=135478

 

Resolute Reports Preliminary Fourth Quarter and 2015 Results

US $

 

Q4 adjusted EBITDA of $41 million / $276 million in 2015

Lower costs and CAD tailwind insufficient to overcome $348 million of lower pricing for 2015

Net pension & OPEB liability dropped by $438 million

Continuing to execute on growth strategy into tissue with Atlas Paper acquisition

Q4 loss of $0.29 per share (excl. special items) / GAAP net loss of $2.39 per share

[Ballinvarosig Investors]

You guys must be absolutely throwing your guts up at this stage. 2015 was undoubtedly an even worse year than even the most bearish forecast, but it does look like 2016 will bring (slightly) better days. Newsprint prices are up, so that should mean that the horrible bleed on that segment should at least be plugged for the time being. Tissue started being included as of late 2015, so you'd expect a positive contribution from this area in 2016. Yes paper is in the toilet, but even when compared to peers, RFP is under-priced. Market cap is currently $550m off the back of $275m EBITDA, so we're trading at just 2x EBITDA. A normalized figure for forest/paper companies is to trade at 6x EBITDA. Price to sales is currently 0.15 - whereas the industry standard is more like 0.35. Valuations are clearly being impacted by the poorly performing newsprint operation, but management have been smart about cutting back here. There's no immediate liquidity risk, and operationally things will start to improve (albeit slowly) as tissue starts to take off, housing starts increase, and newsprint accounts for less and less of the business. This is certainly not a get rich quick scheme - but I think if the paper/timber commodity cycle turns - then the patient investor (think a timeframe of a decade) could very well be rewarded with a ten-bagger. You really do have to sit and be patient with this one though. At least be consoled that management seem capable and are invested with you, and that the leverage isn't too crazy.

[SharperDingaan]

There are currently so many better choices out there for your $, and patience; that it is well worth while taking the lumps & moving on. Glencore, Billiton, Anglo, Barrick, potash, big oil, etc., etc – versus pulp & paper & more restructuring.

 

SD

 

[A_Hamilton]

FFH buys more.

 

https://www.sec.gov/Archives/edgar/data/915191/000110465916120570/a16-11075_1sc13da.htm

 

 

[zenith]

Their was a large block traded a few days ago, it was Steelhead selling more of their stake and Prem bought those shares.

[Ballinvarosig Investors]

End of year results out, share price cratering again.

 

https://www.sec.gov/Archives/edgar/data/1393066/000119312517028278/d313828dex991.htm

[Ballinvarosig Investors]

http://business.financialpost.com/news/economy/u-s-slaps-more-duties-on-canadian-lumber-shipments/wcm/390653ed-2379-4a98-b072-b2d4407b41fa

 

This is the last thing that RFP need now. They sustained negative free cash flow of $100m in just the last quarter alone. with only $39m of cash on hand and with $340m available on their revolver, the company really is skating close the the edge here. I am starting to think if anything, this company might be an interesting short.

[FFHWatcher]

http://business.financialpost.com/news/economy/u-s-slaps-more-duties-on-canadian-lumber-shipments/wcm/390653ed-2379-4a98-b072-b2d4407b41fa

 

This is the last thing that RFP need now. They sustained negative free cash flow of $100m in just the last quarter alone. with only $39m of cash on hand and with $340m available on their revolver, the company really is skating close the the edge here. I am starting to think if anything, this company might be an interesting short.

 

$4.20 at the time of this post which was virtually the 52 week low (June 27/2017)

$11.30 currently (Jan 3, 2017) which is close to 52 week high

 

Hoping no one went short.

 

Another FFH favourite is up...

Heck, even Blackberry is up to $16 from $10. or so from the low in 2017.  Might these two turnaround stories that FFH is heavily invested in actually turnaround?  I guess if you wait 5-10 years, most companies will eventually turnaround?

 

[KFRCanuk]

http://www.cbc.ca/news/business/china-cryptocurrency-quebec-manitoba-mining-1.4484307

 

===

Alain Bourdages, a company vice-president at Montreal-based Resolute Forest Products Inc, said by phone that the company has been contacted by cryptocurrency companies about possibly sharing their existing production sites, or ones that are no longer in use.

 

"We are looking at this prudently," he said. "It's an interesting opportunity that could generate value."

===

[maybe4less]

Anyone looking at this again? Lumber prices are the usual rollercoaster, but pulp prices are way up over the last year apparently because China no longer wants to buy recycled paper. They are making money hand over fist right now and have paid down most of their financial debt. However, it's unclear to me how long new supply will take to come online.

 

Any thoughts are appreciated.

[Spekulatius]

No discussion of RFP is complete without discussion the pension issue - there is still a $1.088B funding gap in addition to the ~$600M in debt. I also noticed some share dilution bleed, but haven’t looked at the root cause.

 

Personally, I don’t care for it - they are just into many crappy business at the same time. There are very reasonably priced companies in the container board /packaging business (PKG etc) or even lumber (WY) and this is where I am keep watching (don’t own anything yet).

[A_Hamilton]

Who knows what will happen here, but it appears RFP finally has some legs with lumber continuing to sustain all-time high prices, pulp prices coming off the bottom and the company finally getting a bit of EBITDA from tissue. They also appear to be repurchasing shares hand over fist. Increase in the pension liability will be a nightmare again, but seems like things are trending in the right direction for the first time in a while here.