Description

Boise Cascade

Thesis:  BZ trades at a significant discount to its peer group while maintaining a better product mix, and no legacy liabilities.  As the investment community recognizes this value through operational performance and Wall St. coverage (expected 3 bulge bracket investment bank initiations within 2 months), this valuation gap will close.  At a peer group valuation, BZ would be worth $14.47 or 147% upside from the current px of $5.86/share.  Currently BZ has sold off on cost concerns (recent press release 4/7), which are definitely there, but pricing is more than offsetting this and not being factored in by the investment community.  In addition non-fundamental SPAC holders are selling, warrant holders hedging, and a lack of Wall St. coverage (one analyst – Ladenburg B: $14 target) has kept information tight.  Of note: There has been major insider buying across the management team at levels in-line and higher than here, proving their commitment and belief in a higher share price. See below for details:

Description:  Boise Cascade is the company that resulted from the Terrapin led SPAC’s (Aldabra II) acquisition of the Uncoated Free-Sheet, Linerboard, and Newsprint assets of Boise Cascade from Madison Dearborn.  Boise’s paper division manufactures and sells three main products; uncoated free sheet paper (UFS), pulp, and container board (corrugated medium). Uncoated free sheet paper is comprised of three basic products; copy paper (cut size copy paper), printing and converting (offset printing, envelopes, form bond, and tablets), and value added papers such as colored paper and labels. In 2006 Boise Cascade was the fourth largest manufacturer of uncoated free sheet paper in North America with a market share of 11% (now number three following the Domtar/Weyerhaeuser deal). About five manufacturers control 75% of capacity.  The company has recently upgraded facilities at their Wallula, Washington plant to produce higher margin specialty and premium products including label & release papers and flexible packaging (a growing industry in the paper & packaging business).

Understanding EBITDA: While information in this name is limited (there is currently only one analyst that covers them – Ladenburg B: $14 target), through a recent company presentation (http://www.aldabracorp2.com/images/Aldabra_2_Roadshow_11.26.07.pdf), one can back into 2008 EBITDA figures through the company’s stated sensitivities to their respective markets, where those markets are now, and the levels in the company’s assumptions.  In the S-1, the company used RISI pricing assumption of $990/ton for UFS, $542/ton for linerboard, and $623/ton for Newsprint giving an annual EBITDA figure of $337mm.  Given the sensitivities to each, BZ will see an additional $45mm in EBITDA net of expenses:

EBITDA benefit of higher pricing:

UFS       @ 1mm tons * $75 increase = $75mm/yr

Newprint    @ 400k tons * $60 increase = $24mm/yr

Total:                +$99mm EBITDA (annual run-rate)

On the cost side, fiber will cost them an additional $15 on average (is up $30, but seasonal I think this will balance out – if not then use a $30mm hit), Nat gas will cost them an additional $32mm, and chemicals likely an additional $7mm.

Fiber @ 1mm tons * ($15) = ($15)mm

Nat Gas ($1 = $13mm cost) was $7.50 strip in presentation now call it $10.00 = ($32)mm

Chemicals = ($7)mm

Total:                ($54)mm EBITDA (annual run-rate)

Net: +$45mm EBITDA (annual run-rate)

Therefore, BZ’s run-rate EBITDA looks to be around $382mm.  After adjusting for the timing of the price increases, that figure will be around $353 for 2008 ($338 if use ($30)mm for fiber costs).

Valuation:

Using treasury stock method (using warrants to repurchase stock at $7.50), and $353mm in 2008E EBITDA, BZ trades at 4.3x 2008 EBITDA vs. a peer group (UFS, IP, MWV, NP, PKG, GLT, SSCC) at 6.1x.  I omitted WY for their asset base and premium multiple.  If BZ were to trade at 6.1x, the stock would be valued at $14.47 per share or 147% upside.  Given the smaller nature of the company and an unproven history as a public company I use a 0.5x turn discount and give them a $12.20 target based on 5.6x.  One might argue that this isn’t necessary as BZ carries no legacy liabilities like some of the other paper co’s.   In addition, recent M&A transactions have gone off at approx 9x LTM EBITDA.

From a free cash flow perspective, Boise is one of the strongest free cash flow generators in the industry.  EBITDA in 2008 of $353 less estimated CapEx of $115mm, interest expense of $90mm and taxes of $20mm (low due to NOLs) would result in a 2008 FCF of $109 or approximately a 25% FCF yield (16% if fully diluted w/ no benefit from warrant proceeds).  Note that the industry trades at a FCF yield of 7.7%.  If BZ were to trade inline with its peers based on a free cash flow yield, our price target would be between $18.40 (+228%) and $11.60 (+107%) (depending on how you acct. for warrant dilution).

Capital Structure:

Shares Outstanding: 77mm

Warrants Out ($7.50 strike): 44mm

Total Fully Diluted Shares Out: 122mm

Total Fully Diluted Shares Out post Treasury Stock Repurchase: 77mm

Cash: $40mm

Revolver: $80mm

Term Loan A: $250mm

Term Loan B: $475mm

Second Lien:  $261mm

Total Enterprise Value: $1,477mm

Note:  If you just fully dilute for warrants and put cash proceeds in the bank, the target is reduced from $12.20 to $10.50, still >50% upside.

Investment Risks:

-Economic slowdown historically not good for paper, although takes higher cost capacity out which is a long-term positive

-Warrant Overhang

Catalysts:

-Initiations of Coverage

-Debt Restructuring

-Removal of Warrant Overhang

-Earnings call (5/1) & clarity on pricing benefits

Catalyst