ACADIAN TIMBER CORP ADN.
August 24, 2017 - 2:28pm EST by
natty813
2017 2018
Price: 18.45 EPS $1.00 $.90
Shares Out. (in M): 17 P/E 18x 19x
Market Cap (in $M): 309 P/FCF 14x 14x
Net Debt (in $M): 75 EBIT 0 0
TEV ($): 384 TEV/EBIT 16x 15x

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Description

 

The investment thesis for Acadian is based on the following points:

  1. Acadian Timber is an attractive absolute value offering an estimated 7% FCF yield, approximate 6% dividend yield, while trading at a low implied value of $358/acre.  Timber REITs Potlach, Rayonier, and Weyerhaeuser all currently offer dividend yields between 3.4% and 3.9%.  While theoretically attractive, none of these companies actually cover their dividend through the generation of free cash through timber harvests.  These comparables cover their dividends through a) borrowing, b) issuing stock, c) selling acreage – i.e. liquidating, or d) through the aid of their wood products or other taxable subsidiary.  Most companies use a combination.  In contrast to these companies, Acadian offers an approximate 6% dividend, which is well covered through the sale of actual fiber – sawlogs, pulpwood, and biomass.  Acadian’s EV/acre is $358/acre.  To be clear – this is effectively close to the private market values of Maine and New Brunswick real estate.  My calculated NAV is $20.47.  That noted in a world where Southern timberland trades at $1,800-2,000/acre, Western timberland often tops $4,000/acre, and NYC townhomes sell for $80MM - $358 per acre is a low absolute price.  Certainly, timber grows slower in the North but current harvest levels for ADN are sustainable.  The bottom line is that at the current price the company pays investors a well-covered 6% yield.  The components of timberland returns are cash yield, real growth in per-acre pricing, real growth in product pricing, and biological growth.  Beginning with very reasonable per-acre values and an attractive cash yield points to a situation where long-term holders of Acadian are likely to generate double-digit total returns over a long time period, consistent with historical timberland investment returns.  

  1. Timber is a unique and attractive asset class. Historically the asset class has offered equity-like returns with lower volatility, a positive correlation to inflation, and good historical performance during equity bear markets.  Timber is a renewable resource and a carbon consumer.  Timberland requires effectively no capital and EBITDA margins are high.  While end markets are cyclical, owners always have the option of deferring harvests and seeing the value of their merchantable inventory grow “on the stump.”  GMO notes the following regarding timber:

Every year the world consumes more than 1.6 billion cubic meters of wood for industrial uses, including paper and board as well as solid wood (construction, furniture) – an amount equal to the consumption of cement, steel, plastic, and aluminum combined.  Wood products are energy-efficient, since the processing of wood products consumes only a fraction of the energy required to manufacture these other materials.  Additionally through repeated cycles of growth wood is a net absorber of atmospheric carbon. The supply of accessible natural timber has not kept pace with demand over the past few centuries.  Natural forests within economic transportation distance of timber markets have been cut much faster than they can grow, and in the meantime, the the rate of land conversion from timber to other uses (primarily pastureland, but also farms and buildings), has accelerated.  The supply of wood from natural forests has been substantially replaced by harvest from plantation forests, especially for commodity softwood products that create the bulk of the timber market. In order to match rising demand with supply from these capital intensive plantations, the real price of wood has had to rise.”

Source: GMO

Source: GMO

  1. Acadian is a well-managed company with a history of value creation.  While I do not generally support third-party managements, ADN has historically been well managed.  Brookfield has managed the timber in a sustainable manner and has been able to increase dividends over time.  Their compensation is not egregious.  Brookfield is paid a base fee of $2MM and a performance fee of 15% of the amount by which annual dividends exceed $.9075 multiplied by the number of common shares.  In 2016, the company undertook a strategic review of which nothing occurred.  Over the last decade, the shares have generated a total return of 12% annually, far above both the U.S. and Canadian indices.  

    A conservative near-term target for Acadian is $24.44 or an implied 4.5% dividend yield.  This would still be a more attractive (and covered) yield relative to timber REIT comps.  On a total return basis, this equates to 38%.  I believe that Acadian is a “buy and forget” security.

     

  

 

There are multiple risks to an investment in Acadian:

  • The core business has some cyclicality and is influenced by fundamentals in the lumber, paper and pulp industries.  For reference, EBITDA fell from $18.3MM in 2007 to $12.1MM at the trough in 2009 before rebounding in 2010.  While the company continued to generate FCF, in 2010 Acadian temporarily cut their dividend to 10 cents per share before moving back to $.82 in 2011.  
  • The U.S. Department of Commerce has placed initial duties of between 17% and 31% on Canadian lumber imports.  American lumber producers are seeking a “quota deal” that will limit Canadian imports.  In the past duties have been pulled for producers in Eastern Canada but it is unknown what the impact could be.  I do not believe this will permanently affect the market for Acadian’s sawlogs.  

 

Below is a brief summary of the operations, financials, and management of Acadian Timber:

Operations