Regent Pacific Properties Inc V.RPP

POSITIVE OUTLOOK FOR SECTOR

[SACKPD]

By Brian D. Robinson ([e-mail]) Analysts Look For $1000 Pulp: Canfor Next Takeover Target The forestry industry remains incredibly fragmented in Canada; one which analysts project will undergo increased consolidation in the quarters ahead. With pulp prices projected to hit US$1000, all eyes are on a sector undergoing considerable changes. Toronto, ONT, June 9 /SHfn/ -- Further consolidation in the Canadian forestry sector is seen by analysts as inevitable. With pulp prices increasing and scheduled to hit levels unseen since 1995, it has become far cheaper to buy the company than build the mills. Industry insiders and analysts alike are wondering which company will be snapped up next in the highly fragmented Canadian forestry sector. Following on the heels of the recent Abitibi [T.A] purchase of Donohue [T.DHC.A], Robert Duncan who follows the sector for Research Capital says it's anyone's guess as to who will be the next player to go. +There are a lot of targets out there and I think trying to rule out any one as not being a target is a bit of a mug's game.+ With the Northwood acquisition on the books, Canfor [T.CFP] generated synergies last quarter alone of $14 million with an expected $75 million in savings by the end of the year. +Canfor has a pretty conservative management team and they have guaranteed a minimum of $75 million for this year and $75 million next year for a minimum of $150 million in synergies,+ said Sam Magid, forestry analyst at Salman Partners in Vancouver. Magid maintains a $26 target on Canfor and is looking for EPS in Q2, which closes June 30, between $0.58 and $0.60 on solid revenue growth. Canfor is currently the largest Canadian producer of both softwood lumber and kraft market pulp. The pulp market is where Canfor stands to make its largest gains. All major pulp producers including Weyerhaeuser [T.WYL], Tembec [T.TBC], and Canfor announced they would be raising their benchmark pulp prices to US$710 per tonne effective July 1. Georgia Pacific [GP] was the first to raise its prices effective June 1. Magid sees the real key to the rise of global pulp prices resting with the strength of the Euro. The currency has been on a decline but is showing signs of regaining some lost ground. +As long as the Euro stabilizes, the pulp market is a guaranteed trade to US$1000,+ says Magid. In the past week alone, the Euro has moved from 85 to close Wednesday at 96 against the US dollar. Duncan has a $22.40 target on Canfor and agrees that the Euro recovery has enhanced the outlook for pulp prices in the second half of the year. +If the global economy remains positive for the next 18-months, which I feel it will, then we will see comfortably higher pulp prices.+ Duncan as well, sees a $1000 target for pulp per tonne, taking into consideration the strength of the Euro, as a reasonable target. Roughly 65% of all pulp and paper currently produced in North America is shipped offshore, the great majority of it ending up in Europe. As the Euro appreciates in value, it becomes cheaper for the European market to buy North American pulp. Forestry analysts are counting on the seasonal downtime with pulp producers to tighten the market resulting in higher pulp prices not seen since 1995 levels. Canfor is currently in the middle of its spring downtime, which runs from May to August. The sector has seen a tremendous drop-off in lumber prices over the past few months from US$323 per mfbm (one thousand board feet) to around US$263. +I would expect lumber prices to stabilize at the US$275 level,+ says Magid. With too much capacity, and production levels increasing, lumber prices have taken a beating. Canadian lumber exports are directly tied to US housing starts which have been far off their peak in January as a result of the US Federal Reserve repeatedly raising interest rates. Over 65% of all solid wood demand comes from US housing starts. As far as consolidation in the industry, both Magid and Duncan foresee pending acquisitions as inevitable in a still highly fragmented sector. +Absolutely, consolidation is coming,+ says Magid +The pulp market is the most profitable and the most free cash flow business there is out there now.+ Magid reasons that the pulp business is one business without any new capacity or supply increases which makes it easier and less expensive for a company to buy a competitor outright rather than to build new mills. Duncan, rather tongue-in-cheek speculates; +One can be somewhat facetious and say we may end up with two head offices in Canada in the forestry products industry at some point in the next couple of years.+ As far as Canfor being a likely target, Magid maintains that is a distinct possibility, +Canfor is definitely a takeover target and (CEO David) Emerson will do anything to create shareholder value.+ In a previous March interview with StockHouse, Magid indicated that any of the top three US-based forestry giants; International Paper [IP], Weyerhaeuser or Georgia Pacific would be well positioned to pick up Canfor. There is concern in some parts of the sector that this summer could usher in a strike mandate by the International Wood and Allied Workers Union on the June 15 expiration of their current contracts. The union represents about 30,000 forestry workers. Magid sees an industry that has done well for BC forestry employees and doesn't anticipate a strike materializing. There has also been speculation that various environmental groups such as Greenpeace, Sierra Club and the Coastal Rainforest Coalition intend to step-up their campaigns, in protest against logging planned for the Elaho Valley, 200 kilometres north of Vancouver. Currently, Interfor [T.IFP.A] and West Fraser [T.WFT] have the largest stakes in the region. Canfor, as well as a number of other producers have voluntarily agreed not to log in the area for a period of 18 months until an equitable agreement can be reached between all parties. The forestry producers and environmental groups had been part of a coalition known as the Coast Forestry Conservation Initiative. However, both Interfor and West Fraser have since walked away from the partnership sparking renewed protest. Magid insists that Canfor's interest in the area is a minute part of the business and that Emerson is +far too smart to get involved in that area.+ For Canfor, with pulp prices on the rise, increasing strength in its quarterly financials and ongoing synergies from the Northwood acquisition, its future seems all green.

[darb]

I should think that, with only one mill, Repap will probably be targeted at the end of this round of takeovers. But it will surely be taken out! PATIENCE!