RE:Best way to play this?dosperros - the upside on options could be big if RYAM has a great quarter and does not guide lower for Q4 and 2019. One never knows with RYAM though...they seem to have the unique ability to grab defeat from the jaws of victory. The whole pulp sector is booming but they have not been able to do anything with their legacy RYAM assets (which are now essentially worthless on a pure equity basis). For years the acetate tow market has been in decline (Acetate tow is one of the only pulp products that continue to fall in price) but RYAM's management sat on their hands and had no response - other than to buy Tembec at a huge discount to its market value. They still do not seem to have any answer to the decline in acetate tow - other then to (1) cut costs by eliminating Tembec management (the ones that successfully turned the company around!!), and (2) follow through on Tembec's business plan (grow cellulose ethers business and make high return capex investments in SC & lumber).
As for this quarter it is reasonable to expect a very good quarter. Here is what I anticipate:
SC - 67 million in EBITDA. There should be a higher amount of high value SC products delivered this quarter and there is no drag from maintenance (3 facliities were down for annual or 18 month maintenance in Q2). The risk on this estimate is any hurricane impact on operations. Both major hurricanes were a fair distance away from RYAM operations but there could have been some supply chain impact. Also the cost increases in caustic soda could be a drag. There should be some offset due to lower log costs.
Paper Pulp - 28 million in EBITDA. The high-yield pulp market is on fire since China's policy change to ban recycled pulp. Prices remained high in Q3 and the results should be similar to Q2 with a slight increase in seasonal output
Lumber - 14 million in EBITDA. Lumber prices were down in Q3 but production should be higher due to seasonality and one mill that is back online after taking significant downtime in Q2.
Paper - 20 million in EBITDA. Newsprint prices remain very high, even after the ruling against the US on duties. Demand for paperboard remains stable with no signifianat price movement.
Corporate - 15 million in costs. I cannot get my head around the corporate costs they have disclosed in Q1 & Q2. They are higher than the combined RYAM and TMB numbers were as independant companies. I suspect there are 2 reasons (1) the severance costs associated with the layoffs of TMB employees, and (2) the RYAM management stuffing their own pockets with bonuses and other goodies for a job not so well done (more on that below).
One time items - 20 million. The newsprint duties charged in Q1 and Q2 will be reversed ($5 million) and the sale of the resin business for $16 million.
Adjusted EBITDA should be around $114 million. Adjusted net income should be around $46 million or .72 per share (based on 64 million shares outstanding - no adjustment for possible buyback activity in Q3). I estimate cash should increase by close to $110 million due to strong net income, inventory release (lumber and pulp), reduced capex, return of duties and sale of resin business. Cash could be affected by share buyback activity and debt repayment.
TTM EBITDA will be close to $420 million and estimated 2018 EPS will be close to $2.65. Which means RYAM will trade at an EV/EBITDA multiple of 4.5x and a PE of 4.9. Cash on the will be close to $200 million with total of $400 million of available liquidity.
All of the above says screaming buy!! Industry multiples are 6-7x EV/EBITDA and PE of 10-12. The RYAM discount must be applied to expectations however. Boyton and his board cronies have destroyed $1 billion in market value over the last 4 years. Their R&D efforts have produced a pitiful $10 million of incremental EBITDA while they have watched the RYAM legacy EBITDA fall from $340 million to less than $140 million. Their only excuse is to cry about currency headwinds and falling cigarette sales. Meanwhile management has gorged themselves on undeserved incentive compensation...the top 5 NEOs were paid $50 million over the last 4 years while the house was burning down. Incredibly, Boynton gets a $4 million retention bonus this quarter for all of the carnage as well!
We will see if they use the remaining $88 million of the share buyback allocation at these depressed prices. If this BOD is really intent on creating value they will authorise an increase to the amount of $50-100 million (they have the cash) and in the next 1-2 months repurchase 10-15 million shares. This would be the right thing to do for shareholders, as the current equity value seems incredibly compelling. It would not be a surprise however that they just shrug and do nothing...it would be in line with their inaction over the last 4 years. They repurcahsed shares in Q2 but they also issued an equal amount to management as compensation for the last few years efforts...so thanks for that Boynton and the BOD! We will see in the near term if the share buyback is meant to help create value for shareholders or if it is for management and the BOD to stuff into their pockets.
The one hope is that Marcato has had enough of these clowns and will make a push in the next 12-18 months to overthrow the board. They can have my vote now if they want it...I am not normally one to complain about the management of a business but in this case Boynton & Co and the BOD should be put out to pasture and bring back the Tembec management or anybody else for that matter...