Catching the Falling KnifeWith the market freaking out about plummeting lumber futures, its worth looking at some future financial prospects based on a range of scenarios.
The Georgia Pacific acquisition as reported by IFP leaves out a few details and cherry picks others. Using IFP’s Q1 sales price of $903/mbf and the reported GP margin of $508/mbf we get a COGS of $395/mbf. Lower than IFP’s Q1 GOGS of $512.48/mbf. Pretty attractive. To arrive at the reported USD$53m EBITDA those GP mills sold 104mbf in Q1, implying about 80% of capacity ex DeQuincy. So maybe some upside there.
IFP’s Q1 had minimal contribution from the Westrock Summerville mill, so we can say that the 666mbf in sales was at the low end of potential sales of 800mbf per quarter of production/sales capacity ex the GP purchase.
Pulling together IFP + Summerville + GP capacity we get to 3,920mbf per annum. For modeling purposes, a quarterly number of 830mbf is pulled out of the air, representing about 89% of capacity ex DeQuincy.
Weighted average COGS using IFP’s Q1 $512.48/mbf and GP’s imputed Q1 of $395.00/mbf is $496.59/mbf or $500.00/mbf rounded.
For modeling the future, production of 830mbf/q, COGS inflated by 5% to $525/mbf, bumping G&A to C$25m/q and duties at C$15m/q are used. An f/x of 1.20 is the assumption here. Residual/log sales of $90m/q is added to revenues.
The big question of course of the future price of lumber. Rather than guessing, how about a range of EBITDA outcomes.
Using the above assumptions and the following lumber prices in USD, the resulting quarterly CAD EBITDA is:
$500/mbf – $25.1m
600 – 124.7
700 – 224.3
800 – 323.9
900 – 423.5
1,000 – 523.1
1,100 – 622.7
1,200 – 722.3
1,300 – 821.9
1,400 – 921.5
Coincidentally, about $100m in EBITDA per $100/mbf in lumber price change. Fun.
So that’s half of the EV/EBITDA equation.
What does a Q2 proforma balance sheet look like post GP acquisition?
We’re assuming Q2 EBITDA on $1,300/mbf of $682m, dividend of $130m, cap ex of $35m and the GP purchase of CAD$450m. Taxes don’t flow through the EBITDA calc but do require cash so deduct about 20% of EBITDA or $135m. Opening net cash of $243m plus the foregoing gets a proforma net cash position of $175m. And don’t forget Hammond, which has the potential to add even more cash to the equation.
Take a $30 share price for market cap of $1,950 less cash of $175m for an EV of $1,775 and lay that on top of the EBITDA’s provided to come up with your multiple.
At $500/mbf that’s 17.75x, $1,000/mbf is .85x, etc.
IFP is either very expensive, shockingly cheap or something in between, depending on your assumptions.
Our thinking is the probabilities skew towards cheap.
And yes, the assumptions and calculations can be wrong and constructive input is appreciated.