Ticker Symbol: KS Date: 4/28/2011 By Raj Dhawle Patil Rajani Meka Image: KapStone Investor Presentation, Feb. 2011.
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Ticker Symbol: KSDate: 4/28/2011
ByRaj Dhawle Patil
Rajani Meka
Image: KapStone Investor Presentation, Feb. 2011
Kapstone manufactures paper packaging and forestry products
Headquartered in Northbrook, Illinois
Sells in domestic as well as International markets Principal markets: Americas, Europe &
Asia
Net Sales: $782.2 m; up 24.9% Operating Profit: $68.7 m; down 54% Net Income: $65 m; down 19% EPS: $1.38 per share Stock does not pay dividends Net Debt: $48 m Market Cap: $780.42m
Source: 10-k, fiscal year ending Dec.31st, 2010
Management Team: Roger Stone & Matt Kaplan
Source: http://ir.kapstonepaper.com/phoenix.zhtml?c=190219&p=irol-irhome
Source: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9ODE0NTh8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1
Unbleached Kraft Market Unbleached Kraft Paper Linerboard Saturating Kraft Unbleached folding carton board
Forest Products Dimensional Lumber Timber
Images: KapStone Investor Presentation, Feb. 2011
Market share of 19%;300,000 tons Sold as three main types of products:
Multiwall Paper: Bags for agricultural products, pet food, baking products, cement & chemicals
Specialty converting Paper: Wide application in coating and
laminating applications, wraps, end caps and dunnage bags
Grocery bag & Sack Paper: Bags and sacks for retail, lawn and leaf, fast food carryout and grocery
Images: Kapstone investor Presentation, Feb 2011
Surface facing on corrugated boxes; 565000 tons
Sold under brand name“Durasorb”; 325000 tons per year Market Leader Found in high pressure laminates Products include furniture, shelving, counter tops, medical
surfaces, flooring and industrial laminates for sliding and plywood overlays
Sold under the brand named“Kraftpak”: 110,000 tons
Strong position in Niche market Uses include beverage, gift boxes, take out cartons,
retail food and quick serve cartons.
Images: Investor Presentation, Feb, 2011
Process
Strengths Weaknesses
One of the leading manufacturers of Kraft
LT contracts with customers
Good product Mix Long Term Contracts with few suppliers
Well positioned in Unbleached Folding Carton Business
Fluctuations in prices of inputs
Highly Efficient Operations Dependence on current management
Mills located in excellent wood baskets
L-T contracts with suppliers for inputs
Customer diversification
Opportunities Threats
Increase in worldwide demand Volatile commodity prices
Industry towards consolidation Cyclical industry
High Demand for laminates from Asia
Compliance issues
Shifting of focus on unbleached folding carton from consumer brands
Recent Stock Performance
Source: http://finance.yahoo.com/q/ta?t=2y&s=KS&l=on&z=l&q=l&p=m20&p=m200&c=^gspc
Source: http://web.ebscohost.com/bsi/pdf?sid=2029ad4a-4dac-45bc-a2b4-08bf3497f8af%40sessionmgr110&vid=5&hid=122
-Highly Fragmented -Highly cyclical with product prices fluctuating with input prices-Undifferentiated products easing the entry of new players-Moving towards consolidation -More emphasis on eco-friendly products-Historical CAGR, 2005-2009: 2%
Source: http://web.ebscohost.com/bsi/pdf?sid=2029ad4a-4dac-45bc-a2b4-08bf3497f8af%40sessionmgr110&vid=5&hid=122
Positive effects of economic recovery Demand rebounded significantly leading to
maximum operating rates Paper prices rebounded Improved product mix due to strong demand for
saturated Kraft products, domestic linerboard and Kraft paper
Benefits from Industry consolidation Unprecedented level of supply discipline and
Inventory management Availability of high quality, attractively priced assets
Source: 10-k, Fiscal year ending Dec.31st, 2011
$611 Revenue/Ton
Source: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9ODE0NTh8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1
Source: 10-k, Fiscal year ending Dec 31st,2010
Company Name P/E fwd P/E ttm EPS P/B P/SEnterprise
Value/ Revenue
Enterprise Value/
EBITDA
Kapstone 11.29 12.27 1.39 1.87 1 1.06 7.45
International Paper 9.25 20.26 2.7 1.93 0.52 0.79 6.08
Smurfit Stone 11.2 4.8 2.59 1.38 0.58 0.7 7.57
Temple-Inland Packaging 11.21 15.2 1.42 2.67 0.65 0.89 8.47
Rock-Tenn 8.87 12.34 5.86 2.64 0.92 1.26 7.48
Graphic Packaging 11.96 59.78 0.36 2.31 0.45 1.05 7.6
Multiples P/E fwd Enterprise Value/ Revenue Enterprise Value/ EBITDA
Share Price $15.57 $14.08 $17.17
- The following assumptions are based on Global Economic factors, Industry outlook, Management guidance, Company’s ability to generate sales and contain costs. However, these assumptions are extremely conservative and on the assumption that the company would not acquire in the near future.
Cost of Equity 15.29%
CAPM: 15.22%
Risk Free Rate 3.40%
Market Risk Premium 6.00%
Beta 1.97
ROE( Historical Average) 15.40%
Cost of Debt 2.00%
Discount Rate : 13.50%
2011 2012 2013 2014 2015
Net Income 59.39 109.75 166.02 167.33 156.03
D&A 42.17 50.35 51.44 57.11 58.92
Capex (41.00) (49.20) (59.04) (70.85) (85.02)
Changes in NWC (16.16) (14.01) (3.53) (16.82) (12.89)
Free Cash Flow 44.39 96.89 154.89 136.77 117.05
Terminal Value 1148.17
Total Free Cash Flow 44.39 96.89 154.89 136.77 1265.22
Enterprise Value $974.40
L-T Debt 115
Shares Outstanding 45.85
Share Price $ 18.74
Discount Rate 13.50%
Terminal Growth Rate
3.00%
-Revenue assumptions on the basis that Kapstone would continue its trend of acquisitions, and that it makes a single acquisition in 2013 with much lesser sales growth of 60% compared to 08’s sales growth of over 100%-COGS have been assumed to fluctuate as its inputs are from a highly cyclical industry and also based on the new revenue assumptions- After adjusting CAPEX to account for the acquisition, DCF now gives a price close to $35
DCF Range: $14.36 - $35.59, Base Case: $18.74 Triangulated Value: $17.31 Current Stock Price: $16.91
We would like to buy 200 shares at market, but due to market uncertainty, Recommend Placing on Watch List
Reasons: Portfolio Diversification Huge upward potential Company Analysis: Product differentiation, Good credit
rating, Low debt, Known for increased shareholder value, Experienced management
Industry Analysis: Growing kraft paper market, Increased demand
Kapstone AEO DO MCD WAG JKHY WFR MOS
Kapstone 1.000
AEO 0.317 1.000
DO 0.371 0.337 1.000
MCD 0.312 0.331 0.341 1.000
WAG 0.296 0.296 0.410 0.373 1.000
JKHY 0.413 0.380 0.478 0.492 0.446 1.000
WFR 0.352 0.403 0.473 0.312 0.268 0.478 1.000
MOS 0.231 0.285 0.427 0.194 0.221 0.314 0.420 1.000
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