The following is excerpted from ERA Forest Products Investment Strategy: Actionable Investment Ideas in the Forest Products Sector, published to ERA clients October 3, 2014:
The primary driver for Cascades is its paper packaging business, but tissue remains a key component (and additional tissue capacity will be added once the machine-conversion project in Oregon is complete later this year). On an NAV or sum-of-the-parts basis, it is quite easy to achieve at $9–$10 valuation for Cascades. However, given its large family ownership, relatively high debt level compared to its peers, and an eclectic collection of assets (European boxboard, partial ownership of Boralex, multiple special products, etc.) is has never been an easy company for the Street to value. However, at its current share price of just over C$6.00, coupled with stable recovered paper prices and a weakening Canadian dollar, its value is once again compelling.
…with the shares trading just above C$6.00, we see little downside to the name, and 15%–20% upside.
Cascades has been slowly divesting or closing some of its older, less-efficient facilities and has invested in a world-class containerboard mill (60% ownership of Greenpac) and a new ATMOS tissue machine. While the potential to monetize its Boralex holdings and pay down its debt would be a great move, we don’t see that happening in the near term. Regardless, with the shares trading just above C$6.00, we see little downside to the name, and 15%–20% upside.