Description

CLW has been written up several times.  What makes it interesting this time is the company has announced the sale of its tissue business for $1.06B to Sofidel America, representing a 6.0x EBITDA multiple.  The deal is expected to close in the "latter part of 2024."  That is a very good result for a business that has demonstrated cyclicality over the years and is inline to better in comparison to many historical paper industry transactions.

The proceeds will be used predominantly to delever and invest opportunistically in other grades of SBS.  When the smoke clears, CLW will have approximately $250mm of net debt and continue to operate as the #2 Paperboard producer of SBS grades to converters.   SW and CLW will be the dominant US players in the space. SBS is approximately 4.4mm tons in the US.  CLW produces 1.5mm of that.

The stock ran up to $55 on the announcement of the tissue sale and has pulled back to $30 after the company reported a slightly weaker Q2 than expected, much of that due to maintenance-related downtime. 

During Q2, CLW closed on the purchase of a paperboard mill from Graphic Packaging (GPK) for $700mm. The Augusta mill has historically done $100-150mm of EBITDA at higher SBS prices and $100mm in 2023.  With prices lower at this point,  I am assuming they mill will do $70mm in 2025.    It has 200k tons of open capacity so there is room for upside given any growth in the market but for purposes of modeling 2025, I assume no incremental tons are sold.

Historical Paperboard Segment

          EBITDA                Price/ton         Volume (000' tons)

2016   140                       937                797

2017   131                       952                828

2018   170                       975                859 

2019   155                       1004              844

2020   161                       992                837 

2021   162                       1089              822

2022   222                       1356              815 

2023   207                       1375              752

1H24*  96                        1250              460   

Pro Forma 2025 EBITDA assumption:

Core Paperboard EBITDA      170**  

+Augusta Mill EBITDA          70

-Corporate                           50

EBITDA                               190

-Capex                                70-80

FCF                                     115

 per share                            $6.75   

Enterprise Value                  $725

EV/EBITDA                          3.8x  (half the comp group)

Why so cheap?

Concern stems from an increase in paperboard capacity expected in 2025 that could negatively affect pricing.  Sappi announced in November 2022 that it would convert a paper machine at its mill in Somerset, Maine to SBS production, with start-up planned for the second half of 2025. Sappi estimates capacity upon completion to be 470k tons (vs. 2023 U.S. SBS production of 4.4MM tons, per RISI).  

This concern may be real but is mitigated by several offsetting factors that the market seems to be underappreciating at this valuation: 

1) SAPPI is using an older retrofit of a paper machine and using slow-growing northern fiber so the product's end use is unproven for many applications

2) Even at full capacity, the machine will be replacing 5% of capacity that came out of the market in 2023 based on various closures

3) Any pickup in demand can absorb that capacity pretty quickly and inventory data is notoriously volatile and unpredictable in these grades of paper

4) The most recent RISI report mentioned Suzano as interested in increasing its US presence so there should be some downside protection to CLW given its valuation and potential fit for Suzano in the wake of their failed bid for IP

 Risks

   -Demand for SBS declines and pricing reverts to under $1000/ton

 *   adjusted for $32mm impact from Lewiston maintenance

 ** assumes 1.2mm tons at $1100/ton blended price and 13% EBITDA margin (below hist averages)

 Sources: Company filings, Bloomberg.

Catalyst

Closing of tissue sale

Increased share buybacks

Additional Paperboard closures