Description

Crown Partners is a Master Limted Partnership with roughly 837,000 acres of timberland and 6 sawmills all located in the Northwest of the U.S. The stock does not look like your average value play on first glance. There are several factors that have let to a sharp decline in the company's stock price. Last year the company made it quite clear that they were shopping some of their assets or the company as a whole. Several people close to the situation have said that CRO did infact receive an offer from Plum Creek (PCL) in the $24 range. Management apparentely balked at this offer thinking that they were worth more. Eventually Plum Creek struck at deal with Timber Company (TGP) instead and CRO proceeded to trade down several dollars a share over the next few months.
Crown also got hammered when it decided to end its divided payout indefinitely at the end of last year. Clearly such a situation warrants a decline, but it was oversold. The reason why I believe that the stock was oversold is two fold. One, many people own these timber stocks purely for their high historical dividend payout ratios. These people are not interested in the companies themselves just receiving the constant income source. So obviously these stock holders exit the stock when their reason for owning it ceases to exit. The second reason has to do with the reason the company decided to suspend its divided. The profits of an commodity based industry like timber is driven by the price of that commodity. Timber prices, especially in CRO's region, have been very depressed. Crown knows that the industry is cyclical and thus prices will come off of these lows. The value of timber also increases in time. Thus Crown is able to maximize its value by not cutting its trees at the depressed prices and instead letting them increase in value to be sold when prices rise again. Crown's decision to not cut down their trees is based on maximizing shareholder value (management has a large stake in the company) but at the expense of those requiring the divided payout. Soon the company will reinstate the divided when they decide prices are favorable once again. This is the exact strategy that the private market practices. They view cutting their trees at unfavorable prices as destroying the asset's value. Since they are under no pressure to pay dividends, they allow their trees to mature while they wait for a turn around.
The final issue that has hurt this company is its long term debt. They took on this high debt load when they were acquiring many timber tracts. Meeting the bank covenants and interest payments became a problem when they chose to slow the harvesting of their timber. This no longer appears to be a problem because they have been able to modify the covenants requiring specific cash flow to interest payment requirements. Those have also been selling off parts of the less attractive saw mill business to raise cash.
Now with the problems out of the way, I will focus on why it is an attractive situation to be in. I have provided some liquadation analysis below that details the going rate of the company's assets. I took the price per acre that other timber tracts in the same area have sold for recently and applied them to CRO's timber at a discount. According to this valuation, the land and saw mills are worth about $1.13 billion. With net debt of $689 million, this equates to equity value of $442 million or a 54% discount to where the stock trades. This appears to be the best way to value the company since its cash flows are basically at the discretion of management. However, when Crown does return its harvesting to normal levels, it will begin to trade at old levels or higher considering that the more mature trees will be worth more.


Crown Pacific Partners LP CRO

Estimated Unit Prices are 15-30% below similar transactions prior to 6-5-01

Asset # of Units (MBF-Acres) Price per Unit Estimated Value

Sawmills 600,000 $250 $150,000,000


Interior Timberlands 221,689 575 127,471,175


Washington Lands 286,673 1,600 458,676,800


Orgeon Lands 329,223 1,200 395,067,600

Total Net Asset Value $1,131,215,575

Net Debt 689,200,000
Net Equity Value 442,015,575
# of Shares Outstanding 30,527,030
NEV/Share 14.48
Current Share Price 6.75

Discount 53.38%



INDUSTRY: Timber
COMPARATIVE VALUE ANALYSIS


9/20/2001
Symbol CRO


Stock Price $6.75


52 week High 18.63
52 week Low 6.55
% off high -64%
% off low 3%

Shares Outstanding 31
Market Capitalization 206
Float 26
Short Interest 0
Short/Float 0.22%
Avg. Daily volume (in 000s) 90

Dividend 0.00
Yield 0%

Book Value per share 4.35
Price/Book 1.6

Fiscal Year
12/2000
Ownership Structure MPL

I. P/E VALUATION
Earnings Per Share (CY)
1999 1.13
2000 0.44
2001E -1.14
2002E 0.09
untaxed
Price/Earnings
1999 6.0
2000 15.3
2001E (5.9)
2002E 77.1

Earnings Growth
1999 to 2000 -61.1%
2000 to 2001 -358.7%
2001 to 2002 -107.7%
1999-2002 average #NUM!
IBES LT growth rate 5.0%
2001 PE/IBES LT Growth Rate (1.19)


Quarterly Earnings: Calendar year
1999a 1Q 0.25
1999a 2Q 0.32
1999a 3Q 0.28
1999a 4Q 0.27

2000a 1Q 0.27
2000a 2Q 0.23
2000a 3Q 0.22
2000a 4Q -0.28

2001a 1Q 0.27
2001a 2Q 0.23
2001e 3Q 0.22
2001e 4Q -0.28

Quarterly Earnings Growth
1999 - 2000 1Q 8.0%
1999 - 2000 2Q -28.1%
1999 - 2000 3Q -21.4%
1999 - 2000 4Q -203.7%

Change in Current Qtr Estimate (%)
One Week 0.00
One Month 25.45
Three Months 268.00
Change in FY 2001 Estimate (%)
One Week -
One Month -
Three Months 45.32
Change in FY 2002 Estimate (%)
One Week -
One Month -
Three Months (79.29)


II. ENTERPRISE VALUATION

Cash/ST Investments 5.66
Note Receivable on Timber sales 122.23
ST Debt 36.17
LT Debt 687.87
Acquisition
Preferred/Other -
Net Debt 596.1
Market Cap 206.1
Total Ent. Value 802.2

EBITDA(MM)
1999 141
2000E 131
2001E 82

TEV/EBITDA
1999 5.7
2000 6.1
2001E 9.8


Full Year 2000 EBITDA
Net Income 13.43
Preferred/Other
Taxes -
Tax Rate -
Interest expense (income) 62.30
D&A 55.60
EBITDA 131.33

Full Year 2001 EBITDA Estimate
Net Income (34.75)
Preferred
Taxes -
Tax Rate -
Interest expense (income) 59.00
D&A 58.00
EBITDA 82.25



III. FINANCIAL AND OPERATING STATISTICS
Leverage:
Net Debt/Total Cap (at market value) 74.3%
Net Debt/2000E EBITDA 4.5
2000 EBITDA/interest expense 2.1

Catalyst

There are several potential catalysts:
1. The whole company or some of its assets can be bought since they are still technically for sale.
2. An upswing in log prices will allow them to harvest more of their timber. This in turn will allow them to restore the dividend as will attract income seeking investors back.
3. Finally, the current environment might draw more people to asset based stocks like CRO.