Resolute Forest Products Inc. RFP

Scotia

[dosperros]

This is a guy who plods forward and sounds reasonable astute despite a myopic take that's usually wrong by undershooting (on this name at least, all I've ever observed him missing).  If his imaginary sum of parts was substantive (it's not) it would be hard to justify a cut.  Just picking ***s out of the air, as they’d say in Hot Tub Time Machine.
 
 
 

Resolute Forest Products Inc.

• RFP-N: US$14.22
  RFP-T: C$18.03
• Target: US$18.50
  Old: US$20.00
• Rating: Sector Perform

Q4/21 – Large EBITDA Miss on Cost Inflation; Strategic Review Process Underway for Tissue Segment

OUR TAKE: Mixed. RFP reported adj. EBITDA of $85M (after $26M in paid lumber duties), 41% below our estimate of $144M and 37% below consensus estimate of $134M. This compares with $103M in Q3/21 (after $39M in duties) and $100M in Q4/20 (after $29M in duties).

Significant EBITDA Improvements Ahead. The soon-to-be idled Calhoun mill earned EBITDA of -$15M in Q4/21 (and -$53M in 2021) should provide YoY EBITDA improvement in the $25M-$30M range in 2022, net of the $15M negative impact on the Tissue segment. In addition, we expect higher lumber shipments and prices (at least in Q1/22) and higher paper prices to more, partially offset by continued input costs inflation (mainly in 1H/22).

We reiterate our Sector Perform rating and reduce our target to US$18.50 on the back of a weaker Q4/21 and 2022 forecast, partially offset by a 26% reduction in pension liability.

KEY POINTS

Variance analysis. The EBITDA variance vs. our estimate was due to higher-than-expected results in Tissue (+$2M) and lower-than-expected Duties (+6M) that were more than offset by lower-than-expected results in Paper (-$21M), Pulp (-$10M), Wood (-$28M), and Corporate costs (-$8M). Overall, higher-than-expected COGS (-$43M; including $12M in share-based compensation) and lower-than-expected Prices (-$14M) explain most of the variance.

Strategic review process initiated for Tissue segment. As a result of the indefinite idling of the Calhoun facility (and $15M negative impact on Tissue profitability), management received expressions of interest that led to the launch of a strategic review process. While we do not expect a very high price tag for assets expected to generate marginal EBITDA as a going concern, a sale would reduce ongoing fixed ownership costs for the Calhoun site.

Enhanced financial flexibility. RFP ended the quarter with $953M of available liquidity ($112M of cash, $841M available under revolving credit facilities, Exhibit 2). The company's net debt to LTM EBITDA ratio stood at 0.2x, similar to 0.2x last quarter. Moreover, its pension liability dropped 26% to $1.151 billion at December 31, 2021. RFP repurchased 1.3M shares, or 2% of o/s for $14M in Q4/21 and 4.6M shares, or 6%, in 2021 ($48M), concluding the last repurchase plan announced in March 2020. RFP recently announced a new share repurchase plan of up to $100M or 10M shares, whichever comes first.

• Quarterly Financials
• Yearly Financials

Historical price multiple calculations use FYE prices. All values in US$ unless otherwise indicated.
Source: FactSet; company reports; Scotiabank GBM estimates.

Adj. EBITDA presented net of lumber duties.

Qtly EBITDA (M)	Q1	Q2	Q3	Q4	Year	Current EV/EBITDA
2020A	$17	$20	$120	$100	$257	5.3x
2021A	$192	$388	$103	$85	$768	1.8x
2022E	$144	$146	$142	$112	$545	2.5x
2023E	$149	$141	$139	$124	$553	2.4x

Q4/21 Highlights

• The Wood Products segment reported adj. EBITDA of $66M (net of $26M export duties paid). This compares with $34M (after $39M in duties) last quarter (+91%) and $110M (after $29M in duties) in Q4/20 (-40%). The q/q increase was due to a 7% increase in average transaction price to $612/mbf (+$39/mbf q/q), compounded by a further 5% increase in shipments to 539,000 mbf (+28,000 mbf q/q). The higher shipments are due to additional volumes coming from the ramp-up of El Dorado (Arkansas) and Ignace (Ontario) sawmills. RFP’s lumber finished goods inventory decreased by 3,000 mbf to 126,000 mbf compared to 129,000 mbf last quarter (-2%) and 97,000 mbf in Q4/20 (+30%).
• The Market Pulp segment generated adj. EBITDA of $25M vs. $52M in Q3/21 (-52%) and $2M in Q4/20 (n.m.%). The q/q decrease was led by strong decline in shipments to 254,000 mt (-29,000 mt, -10%) along with a decrease in average prices to $806/mt (-$20/mt, -2%). Delivered cost per unit also increased q/q to $732/mt (+$67/mt, +10%) reflecting higher fiber and energy costs. Finished goods inventory increased by 7,000 mt to 59,000 mt, from 52,000 mt in Q3/21 (+13%) and 53,000 in Q4/20 (+11%).
• The Paper segment reported $12M of adj. EBITDA. This compares with $31M last quarter (-62%) and -$1M in Q4/20 (n.m.%). The q/q decrease was mainly due to increase in delivered cost per unit to $726/mt (+$78/mt, +12%) owing to higher energy prices and unfavourable maintenance and fiber costs, further exacerbated by decrease in shipments to 354,000 mt (-10,000 mt, -3%). This decline was partly offset with the increase in paper prices to $718/mt (+$29/mt, +4%). Paper inventories increased by 12,000 mt to 84,000 mt (+17%).
• Tissue reported adj. EBITDA of -$1M compared to -$4M recorded in Q3/21 and $2M during the same period last year. The q/q increase was supported by higher prices to $1,882/st (+$160/st, +9%) due to better product mix and higher shipments to 24,000 st (+1,000 st, +4%). This was partially offset by higher delivered cost to $2,122 st (+$37/st, +2%), partly due to higher freight costs. Finished goods inventory remained unchanged at 6,000 st.