KAPSTONE PAPER AND PACKAGING CORPORATION Ticker Symbol: KS Date: 4/28/2011 By Raj Dhawle Patil Rajani Meka Image: Kap. Stone Investor Presentation, Feb. 2011
COMPANY OVERVIEW Kapstone manufactures paper packaging and forestry products Headquartered in Northbrook, Illinois Sells in domestic as well as International markets Principal markets: Americas, Europe & Asia
RECENT FINANCIAL HIGHLIGHTS FISCAL YEAR ENDING DEC. 31 ST, 2010 Net Sales: $782. 2 m; up 24. 9% Operating Profit: $68. 7 m; down 54% Net Income: $65 m; down 19% EPS: $1. 38 per share Stock does not pay dividends Net Debt: $48 m Market Cap: $780. 42 m Source: 10 -k, fiscal year ending Dec. 31 st, 2010
GROWTH STRATEGY Management Team: Roger Stone & Matt Kaplan In 2007, acquired the Kraft paper business of International Paper company for 155 million In 2008, purchased Kraft paper business from Mead. Westvaco for 485 million Founded in 2005 as a special purpose Acquisition Corp with focus on Paper, Packaging and forest products Source: http: //ir. kapstonepaper. com/phoenix. zhtml? c=190219&p=irol-irhome In 2009, sold its Gunnage bags business to Illinois Tool works for 32 million
-All mills are highly efficient and cost effective -Access to abundant high quality, low cost wood -Strategically located for exports -Annual maintenance Capex around $25 to $30 million Source: http: //phx. corporate-ir. net/External. File? item=UGFy. ZW 50 SUQ 9 ODE 0 NTh 8 Q 2 hpb. GRJRD 0 t. MXx. Ue. XBl. PTM=&t=1
PRODUCT MIX Unbleached Kraft Market Ø Unbleached Kraft Paper Linerboard Saturating Kraft Unbleached folding carton board Forest Products Ø Ø Ø Dimensional Lumber Timber - Images: Kap. Stone Investor Presentation, Feb. 2011
UNBLEACHED KRAFT PAPER q Market share of 19%; 300, 000 tons q Sold as three main types of products: Multiwall Paper: Bags for agricultural products, pet food, baking products, cement & chemicals Specialty converting Paper: Wide application in coating and laminating applications, wraps, end caps and dunnage bags Grocery bag & Sack Paper: Bags and sacks for retail, lawn and leaf, fast food carryout and grocery Images: Kapstone investor Presentation, Feb 2011
LINERBOARD Surface facing on corrugated boxes; 565000 tons Images: Kapstone investor Presentation, Feb 2011
SATURATING KRAFT Sold under brand name“Durasorb”; 325000 tons per year Market Leader Found in high pressure laminates Products include furniture, shelving, counter tops, medical surfaces, flooring and industrial laminates for sliding and plywood overlays Images: Kapstone investor Presentation, Feb 2011
UNBLEACHED FOLDING CARTON BOARD Sold under the brand named“Kraftpak”: 110, 000 tons Strong position in Niche market Uses include beverage, gift boxes, take out cartons, retail food and quick serve cartons. Images: Investor Presentation, Feb, 2011
Process Wood Mill Boiler Chemicals Steam Woodchips Digester Dryer Paper M/c
SWOT Strengths Weaknesses One of the leading manufacturers of Kraft LT contracts with customers Good product Mix Long Term Contracts with few suppliers Well positioned in Unbleached Folding Carton Business Fluctuations in prices of inputs Highly Efficient Operations Dependence on current management Mills located in excellent wood baskets L-T contracts with suppliers for inputs Customer diversification Opportunities Threats Increase in worldwide demand Volatile commodity prices Industry towards consolidation Cyclical industry High Demand for laminates from Asia Compliance issues Shifting of focus on unbleached folding carton from consumer brands
Recent Stock Performance Source: http: //finance. yahoo. com/q/ta? t=2 y&s=KS&l=on&z=l&q=l&p=m 200&c=^gspc
MARKET OVERVIEW -Highly Fragmented -Highly cyclical with product prices fluctuating with input prices -Undifferentiated products easing the entry of new players -Moving towards consolidation -More emphasis on eco-friendly products -Historical CAGR, 2005 -2009: 2% Source: http: //web. ebscohost. com/bsi/pdf? sid=2029 ad 4 a-4 dac-45 bc-a 2 b 408 bf 3497 f 8 af%40 sessionmgr 110&vid=5&hid=122
GEOGRAPHICAL DISTRIBUTION OF REVENUES Source: http: //web. ebscohost. com/bsi/pdf? sid=2029 ad 4 a-4 dac-45 bc-a 2 b 408 bf 3497 f 8 af%40 sessionmgr 110&vid=5&hid=122
MANAGEMENT DISCUSSION & ANALYSIS Positive effects of economic recovery Demand rebounded significantly leading to maximum operating rates Paper prices rebounded Improved product mix due to strong demand for saturated Kraft products, domestic linerboard and Kraft paper Benefits from Industry consolidation Unprecedented level of supply discipline and Inventory management Availability of high quality, attractively priced assets Source: 10 -k, Fiscal year ending Dec. 31 st, 2011
REVENUE/TON $ 6 1 1 R e v e n u e / T o n Source: http: //phx. corporate-ir. net/External. File? item =UGFy. ZW 50 SUQ 9 ODE 0 NTh 8 Q 2 hpb. GRJRD 0 t. MXx. Ue. XBl. PTM=&t=1
TREND OF PRODUCT SALES Trend of each product sales as a % of Total Sales 60% 51% 50% 43% 40% 32% 2008 30% 2009 21% 19% 2010 21% 10% 6% 7% 7% 0% Unbleached Kraft Paper Liner. Board Saturating Kraft Unbleached folding Carton Baord Source: 10 -k, Fiscal year ending Dec 31 st, 2010
COMPARABLES ANALYSIS Company Name Enterprise Value/ Revenue EBITDA P/E fwd P/E ttm EPS P/B P/S Kapstone 11. 29 12. 27 1. 39 1. 87 1 1. 06 7. 45 International Paper 9. 25 20. 26 2. 7 1. 93 0. 52 0. 79 6. 08 Smurfit Stone 11. 2 4. 8 2. 59 1. 38 0. 58 0. 7 7. 57 Temple-Inland Packaging 11. 21 15. 2 1. 42 2. 67 0. 65 0. 89 8. 47 Rock-Tenn 8. 87 12. 34 5. 86 2. 64 0. 92 1. 26 7. 48 Graphic Packaging 11. 96 59. 78 0. 36 2. 31 0. 45 1. 05 7. 6 Multiples Share Price P/E fwd Enterprise Value/ Revenue Enterprise Value/ EBITDA $15. 57 $14. 08 $17. 17
REVENUE GROWTH VS COGS MARGIN - The following assumptions are based on Global Economic factors, Industry outlook, Management guidance, Company’s ability to generate sales and contain costs. However, these assumptions are extremely conservative and on the assumption that the company would not acquire in the near future.
DISCOUNT RATE Cost of Equity 15. 29% CAPM: 15. 22% Risk Free Rate 3. 40% Market Risk Premium 6. 00% Beta 1. 97 ROE( Historical Average) 15. 40% Cost of Debt 2. 00% Discount Rate : 13. 50%
DISCOUNTED CASH FLOW VALUATION 2011 2012 2013 2014 2015 Net Income 59. 39 109. 75 166. 02 167. 33 156. 03 D&A 42. 17 50. 35 51. 44 57. 11 58. 92 Capex (41. 00) (49. 20) (59. 04) (70. 85) (85. 02) Changes in NWC (16. 16) (14. 01) (3. 53) (16. 82) (12. 89) Free Cash Flow 44. 39 96. 89 154. 89 136. 77 117. 05 Terminal Value 1148. 17 Total Free Cash Flow 44. 39 96. 89 154. 89 136. 77 1265. 22 Enterprise Value $974. 40 L-T Debt 115 Shares Outstanding Share Price 45. 85 $ 18. 74 Discount Rate 13. 50% Terminal Growth Rate 3. 00%
UPSIDE POTENTIAL- OPTIMISTIC CASE -Revenue assumptions on the basis that Kapstone would continue its trend of acquisitions, and that it makes a single acquisition in 2013 with much lesser sales growth of 60% compared to 08’s sales growth of over 100% -COGS have been assumed to fluctuate as its inputs are from a highly cyclical industry and also based on the new revenue assumptions - After adjusting CAPEX to account for the acquisition, DCF now gives a price close to $35
RECOMMENDATION DCF Range: $14. 36 - $35. 59, Base Case: $18. 74 Triangulated Value: $17. 31 Current Stock Price: $16. 91 We would like to buy 200 shares at market, but due to market uncertainty, Recommend Placing on Watch List Reasons: Portfolio Diversification Huge upward potential Company Analysis: Product differentiation, Good credit rating, Low debt, Known for increased shareholder value, Experienced management Industry Analysis: Growing kraft paper market, Increased demand
CORRELATION WITH EXISTING PORTFOLIO Kapstone AEO DO MCD WAG JKHY WFR Kapstone 1. 000 AEO 0. 317 1. 000 DO 0. 371 0. 337 1. 000 MCD 0. 312 0. 331 0. 341 1. 000 WAG 0. 296 0. 410 0. 373 1. 000 JKHY 0. 413 0. 380 0. 478 0. 492 0. 446 1. 000 WFR 0. 352 0. 403 0. 473 0. 312 0. 268 0. 478 1. 000 MOS 0. 231 0. 285 0. 427 0. 194 0. 221 0. 314 0. 420 MOS 1. 000
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