I’ve been long Fortress Paper for over a year and a half now. My position varied from 10 to 30% of my portfolio. I’m currently around 15% invested in FTP. The recent drop in FTP share price could scare you. Or it could not. FTP is releasing their Q1 2011 financial statement tomorrow but I thought I would execute a new complete analysis check on this Canadian stock before the release and compile some questions I’ll try to answer tomorrow.
Q1-2011 updates: this new version of the article includes Q1-2011 updates in quotation mode.
The Fortress Paper division is composed mostly of 4 different businesses : Dresden mill, Landquart Mill, Speciality Cellulose and (the brand new one) Optical Security. They also divide the corporate expenses has a separate business in their financials so I’ve put it on has a separate business here.
The company announced that it had completed the second stage of capital improvements at the Dresden Mill in order to enhance the quality and efficiency of its production of non-woven wallpaper base on the 2009 project. The improvements resulted in an increase to the capacity at the Dresden mill by 20% to 45000 tons per annum. Dresden mill currently produce 50% of world total usage of non-woven wallpaper base! Annual profit is stable at 19M since 2009.
Q1-2011 : Record profit with maximum capacity, I love it.
Sole producer of Swiss Franc, Landquart mill is a producer of security paper and owner of tons of patents regarding anti-counterfeit technologies. The mill was producing high and low margin security paper. In 2010, FTP announced a major 22.2M investment in Landquart Mill to rebuild Paper Machine 1 (PM1) to produce solely higher margin security paper. Competition is fierce in this sector and leaded by government contracts. The mill is currently printing for Germany, Swiss and other European countries. The production was stopped in Q3 2010, so profits are sharply down in 2010. In 2009 profits for this mill was 4.9M and in 2010, it turned red 3.5M! A difference of 8.4M. Good news for shareholders, the PM1 was back printing in January 2011 and should produce higher profits. I do expect profits back to 2009 level or more in the current fiscal year.
Q1-2011 update : Landquart Mill efficiency should come in only in Q4-2011 and does suffer from recession. With escalating raw material costs in cotton and over capacity due to the postponement of implementation of several major currencies, 2011 will be a challenging year for Landqart and the banknote industry. I’ll revise my estimates for 2011 to 5M$ losses.
Fortress Speciality Cellulose
This business, currently based on the Thurso Mill project, is the future profit machine of Fortress Paper. It is Chad’s new-born. It produced NBHK pulp last year to temper reconstruction costs and turn high profits on 800-900$ revenue per ADMT (Air Dried Metric Ton). The production of NBHK pulp will stop in August this year (2011) to put the new boiler on. FTP expect the new Dissolving Pulp process to be up and running in Q3-Q4 2011. My target is to get Q4 only on Dissolving pulp production. Remember that this pulp is sold around 1200 to 1500$ per ADMT with a target cost for FSC around 600$ per ADMT.
Chad’s new baby will already be updated in 2012 with a new co-generation plant to recuperate heat from the boilers to create electric power. FSC already signed a contract with Hydro Québec to resell exceeding power. Landquart and Dresden mill already have electric power-plant joined with their mills. Chad is replicating this model with improvements.
FSC also plan on acquiring other mills in Canada. They openly said they were in acquisition mode. I’ve referenced some article (in french) on this site and today, another one got out on the same Domtar mill for sale in Lebel-sur-Quevillion (read it here). New projects are in the air for FSC division.
There currently is one legal action filed against FTP by Sateri against Dissolving pulp section of FTP. We do not know any materiality regarding this legal action. I’ve provisioned 2M in 2012 to cover expenses related to this case. We may need less or a lot more. Another question I’ll try to answer tomorrow.
Q1-2011 update : Lower profit than planned on NBSK. Viscose production should start in late Q3. I’ll keep Q4 has a start date on my estimates.
This new division was bought from the Government of Canada for 750k in 2011. We have no clues on what profit this new division can generate or what customers they may bring in to other division. A new high-tech plant is currently on plan to be built adjacent to the FSC Thurso Mill plant to become the new home of Optical Security division. This new multi-million dollar facility (5M) will surely bring in new profits to Fortress Paper. I do trust Chad’s instincts and I plan on a minimum profit of this new division until the new plant is on. I’ve planned on 500k profit from fiscal 2012. I hope tomorrow statements will give some answers.
Q1-2011 updates : 0.9M sales with small to about no profits at all. Better idea to come in Q2.
Corporate expenses were really high last year. A special one time cash bonus was awarded to Chad for 10M. Stock options were issued for 7.4M! Overall costs of corporate were 18M$ last year. Way too high compared to previous years. I do hope to see theses expenses drop sharply in Q1 2011. If you remove the 10M bonus, we are still at 8M corporate expenses in 2010 compared to 4M in 2009. I do think Chad will keep and higher salary, but I’ve estimated at 10M the corporate expenses for the new fiscal year. I’ll validate this one tomorrow (Q1 should end with 2-3M in corporate expenses).
Q1-2011 updates: Corporate expenses dropped 5.8M in stock based compensation. They were around 2-3M for the quarter has estimated).
- NBHK profit for the first 6 months will equal profits for the last 6 months of 2010 so 3M. I suppose profits will clock in higher due to NBHK selling price increase by 20-30% in the last 6 months. We’ll see that tomorrow.
- Last 3 months will be on production of viscose (Dissolving pulp) and will only provide current contractual sales (155k ADMT) so around 36k ADMT in 2011 at 1200$ per ADMT.
- I would like to see SGA+Depreciation reduced by 8M, but I’ve estimated everything with the current SGA ratio for FSC and reduced corporate expenses to 10M.
- Landquart mill is back to previous year production and profits (5m).
- NBHK prices are not good at all. FTP is losing 1M per quarter instead of .75M profit per quarter.
- Last 3 months on Viscose still on target (actually should be 4months.)
- Dresden mill rocks the house with 7M income! Total year profits are estimated at 28M!
- No reduction in SGA+Dep., actually there was a light net increase in SGA+dep without considering the one time 5M payment in Q4-2010.
- Landquart mill is NOT back to profitability, but is deeply in red (6M in Q1 alone!).
- Full first year on dissolving pulp. Viscose price should be way over 1500$ per ADMT but my worst case scenario is at 1200 and my best at 1500. I planned on production of currently signed contract volumes (155k). Full capacity should be around 200k but I do not expect that in the first year.
- Dresden is evaluated at 19M. High margins and record profits may not be stable.
- Current SGA and Amortization are calculated around 15%. I’ve applied this to any supplemental revenues coming from FSC.
- Taxes in Canada are around 30%.
- Landquart PM1 machine should be up and running and recession ending. I’ve raised profit by 1.5M for the year assuming higher margin security papers.
- Optical Security profit of 500k is a wild guess. It could be anywhere from negative to multi million dollar profits. We’ll see.
Q1-2011 updates :
- SGA+dep were actually higher in percentage without considering share purchase plan. Estimates kept at 15% to include provision.
- Optical sales were 0.9M with small profit. 500k in 2012 may be a good target.
Forecasted profits and share price
My conservative estimate for 2012 would be a total profit of 97.55M resulting in a per share profit of 6.86. I used a P/E of 12 for many reasons. The principal being that FTP is and will be a growing business having a co-generation plant project starting, a good history, doing new acquisition (Lebel acquisition, etc.) with good profitability and low debt. If you do the simple maths, you get a selling price of 82.27$ for a 189% return on current price (28.8).
Q1-2011 updates: based on Q1 performance, profitability in 2011 should be around 1$ per share. 2012 corporate expenses have been updated to 6M from 10M in estimates to remove one time reward on stock based compensation. Resulting in a EPS of 6.72, it gives us a price per share at 80$. This gives us a 65% margin of safety and a 180% possible profit!
Disclosure : Author has a position in FTP and may increase position shortly hoping share price will drop even further.