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Cascades Inc. Initiating Coverage: Edge Crush Test Approaching All figures in Canadian dollars, unless otherwise stated. 16-139922 2016 CIBC World Markets Corp., the U.S. broker-dealer, and CIBC World Markets Inc., the Canadian broker-dealer (collectively, CIBC World Markets Corp./Inc.) do and seek to do business with companies covered in its research reports. As a result, investors should be aware that CIBC World Markets Corp./Inc. may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For required regulatory disclosures please refer to "Important Disclosures" beginning on page 22. Please see "Price Target Calculations" and "Key Risks to Price Target" information on page(s) 20. February 29, 2016 Paper & Forest Products Stock Rating: SE C T O R UN D E R P E R F O RME R Sector Weighting: NONE Key Ratios and Statistics 12-18 mo. Price Target $8.00 CAS-TSX (2/26/16) $9.79 Key Indices: TSXPaper 352-5--wYere. kE PRSa nGgre. Rate (E) $6.49-$13N.6M5 Shares Outstanding* 96.2M Float 65.9M Shrs Avg. Daily Trading Vol. 278,012 Market Capitalization $941.8M Dividend/Div Yield $0.16 / 1.6% Fiscal Year Ends December Book Value $9.78 per Shr 2016 ROE (E) 11.0% Net Debt $1,741.0M CNeotm Amsosne tE Vqauluitye $92 3 .0 M *Ownership: Lemaire Family (31.5%). EPS 2015 2016 2017 2018 Current $1.41E $1.36E $0.94E $0.77E Estimates (Dec. 31) 2015 2016 2017 2018 EBITDA ($mln)-Curr $436.0E $430.0E $374.0E $359.0E Valuation (Dec. 31) P/E-Curr 9.3X 7.8X 11.3X 13.8X EV/EBITDA-Curr 6.5X 6.6X 7.6X 7.9X Company Description Cascades is the sixth-largest producer of containerboard in North America and the fifth-largest tissue producer on the continent. www.cascades.com What's The Event As of February 29, we are initiating coverage of Cascades with a Sector Underperformer rating and 12- to 18-month price target of $8.00. Implications Our Take While Cascades has been one of the best-performing forestry names over the last 12 months, given: 1) recent negative pricing trends in its core containerboard business; 2) increased competition on the horizon in the Canadian and Northeast corrugated market with the start-up of Kruger's new machine in H2/17; and, 3) a challenging supply/demand balance in tissue, we expect Cascades to underperform its peers. Our EBITDA estimates for 2017/18 are ~9% lower than the street in both years. A few months ago, Cascades seemed on the cusp of finally being able to delever as it was reaping the benefits of robust containerboard prices at a time of low input costs. Now, the prices are cracking, recycled fiber costs are moving upwards and deleveraging seems unlikely. At the same time, the industry supply challenges in both its two core segments could compel Cascades to have to increase capex for several years to build out its converting operations in both businesses. On the pricing front, we expect the semi-chem medium benchmark price to fall another US$10/ton by H2/16 (-2% below February's price) while recycled medium prices are anticipated to decrease a further US$25/ton (-5%) by H2/16 from current levels. Our NA containerboard supply/demand model forecasts industry op. rates decreasing from 95.2% in 2015 to 94.0% in 2016, and gradually deteriorating further down to 92.1% by 2019.