Fortress paper q3-2011

As you all probably know by now, I’m a huge fan of Chad and his Fortress Paper company. My judgment may, well is, biased. Anyhow, I’ll try to analyze Q3 report objectively.

In this Q3 I was looking for a reduced loss or even small gain on security paper division. Chad announced a bunch of security paper contracts in the last months so I expected new revenues. I was deeply disappointed in this. Loss for security paper mill increased to 8m for the quarter. But wait, did I dreamed the contracts? No. Here his an extract from MDA.

the Landqart Mill is now in the process of overcoming the low utilization with recent new contract orders representing a significant portion of Landqart’s 2012 banknote capacity.

Security paper production was profitable at 2500 tons a year. Capacity now is up to 10000 a year. With a ‘significant portion’ of capacity booked, I assume we will turn green and even make a descent profit this year(2012). We could even see a 0$ income on security for FTP 4th quarter.
I revised my estimates for 0$ profits on security for FY2012.

I expected a slow decline in revenues of wallpaper plant. After all, this plant is printing at full capacity! I thought raw materials or labour charges would slightly increase. It didn’t happen. Profits came strong at close to 7m, similar to q2.
Chad surprised me again…

The Wallpaper Base Segment completed an additional upgrade of our facility during the annual August maintenance shutdown. The upgrade was successful and has added approximately 10% additional capacity. The order book at the Dresden mill remains strong.

I revised my estimates for next year at 28m profit for FY2012.

Well that was a challenge to estimate. I planned major losses due to shut down for September. It didn’t happen. It seems Chad balanced the shut down cost with higher margin product of speciality pulp in the first two months of the quarter ending up loosing only 1m. I am pleasantly surprised. No adjustment to FY2012.

Make your own estimates on FTP, but on my bearish scenario the stock is fairly valued (I mean bearish). On my conservative estimates the stock has a 150% potential and in my dream scenario…well let’s say it is a dream.

Disclosure : very long FTP.

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Posted in FTP
4 comments on “Fortress paper q3-2011
  1. Doug. says:

    “Chad announced a bunch of security paper contracts in the last months so I expected new revenues. I was deeply disappointed in this”

    That is because contracts obtained “last month” will only result in revenues in the “next quarter”.

    You indicated that you have now created a bearish scenerio (from your more bullish one previously) but never really stated why. Except for Landqart, (which was never really going to add to 2012 earnings anyways) nothing has really changed in the company yet your earnings model has dropped considerably. Wouldn’t hurt to enlighten your readers on that.

    • Dominic Nadeau says:

      Actually my model was updated to consider security paper profit next year. My original model used -10,0,5 millions in profitability ( bear,neutral,bull respectively ). I changed it to 0,5,10.

      On pulp side I’ve updated estimates considering current pulp price so 1200,1500,1800 $ per tons and tons estimates at 155k,175k,200k (full capacity is 200 and signed contract is 175).

      Hope it helps.

  2. Doug. says:

    Well if we take Thurso and use the pessimistic $1,200 per ton and the pessimistic production of 155K tons it still gives $85,000,000 gross profit when a $650 per ton cost is used. Take away 30% for tax, we are still left with over $60 million of after tax profit. That’s $4.25 EPS without even using anything from Dresden or Landqart.

    Still confused at how you could get to $28 million of profit.

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