Description

Back of the Envelope:

Pioneer Companies (PONR) has a TEV of $330mm (11.8mm shares outstanding and net cash of about $12mm at 12/31/06).  In 2006, free cash flow was $78mm (or over $6.50 per share); given current pricing, we would expect (using maintenance capex) that free cash flow would be well over $5.00 per share in 2007.  Due to the cyclical nature of the business, we use the average of the past 10 years of data (a reasonable cycle) to arrive at our normalized estimates of EBITDA ($65mm) and Capex ($18mm).  As a result, based on our normalized estimates, PONR is trading at 5.4x TEV/EBITDA, 7.5x after capex, and 10x free cash flow; with net cash on the balance sheet, we believe these multiples versus comps are cheap (note that Olin, the best comp in our opinion, trades at 15x our normalized after capex estimate).  Importantly, we believe that the company has capital projects in the works that could boost normalized EBITDA to $95mm that will largely be financed by internally generated cash flow.

Background:

Pioneer manufactures chlorine, caustic soda, hydrochloric acid and related products.  The products are used in a variety off applications including water treatment, plastics, pulp and paper, detergents and pharmaceuticals.  Approximately 14.5mm ECUs are produced in North America; Pioneer has a roughly 5% market share (with half it’s production in the U.S. and half in Canada) and Dow and Oxy have a combined 57% share.  The company emerged from bankruptcy in 2001 (due to overleveraging the company’s balance sheet at the wrong time in the cycle) with approximately $200 million in net debt, which has been reduced to net cash of $12 million at 12/31/06.  Similar to many commodities in the past few years, Pioneer has benefited from improved pricing as a result of a strong industrial economy.  Importantly, capacity in the North American market has declined over the past few years and we expect additional net reductions in the coming years. 

Capital Projects:

Pioneer recently completed a debt financing of $100 million principal 2.75% Convertible Senior Subordinated Notes due 2027 (conversion price of $35.31 per share).  The company expects to use the net proceeds of approximately $96.3mm from the offering to redeem it’s remaining $75mm of 10% Senior Secured Notes due 2008 and to assist in financing the capital costs for conversion and expansion of it’s St. Gabriel, Louisiana plan.  The project at St Gabriel will expand production by approximately 25% from it’s current annual production capacity of 197,000 ECUs to 246,000 ECUs (to meet customer demand) and will include the conversion of the plant to membrane cell technology from the existing mercury cell technology (to significantly lower variable and fixed costs at the plant).  The total capital costs of the project are estimated to be $142 million and the project will likely be completed in the fourth quarter of 2008.  The company estimates that this project will increase EBITDA by $30mm/year, brining our normalized EBITDA estimate to $95mm and $75mm after capex.  Given current operating rates and pricing, it is likely that most of this capex can be funded with peak cycle cash generation in 2007 and 2008.

Conclusion:

With no net debt, very strong current cash generation trends, and strong opportunity to deploy internally generated cash flow in high ROIC projects, we believe the company qualifies as both safe and cheap.  Even using a very low multiple of 8x after capex, the company would have a TEV of $600mm with still no net debt at yearend 2008 (or roughly $50/share).  Furthermore, we believe the company did the convert deal with plans for additional acquisitions, which could be cash flow per share accretive and give common holders additional upside optionality. 

Catalyst