Industry Reports

Deutsche Bank Reports Summaries

051118 Deutsche Bank - Dr Paper's Weekly Wrap Up

Deutsche Bank - Equity Research

"Koch & a Smile" That's the story from most GP shareholders and managers. Koch Industries is taking GP private @ $48/share. KI was initially interested in just GP's bldg prod's.

October's containerboard #'s were the best in well over a year. Box ship's +2.6% y/y and inventories took another big drop. C'bd and corrugated sheet prices are up, but box prices still lagging.

Chile's Arauco pointing to a 1.3MM/mton mill in next decade. Arauco started a mill in '04 and plans another in '06. Brazilians recently announced 2 more mills. The new pulp languages? Portuguese, Spanish & Russian(?).

For more information, please click on the attached document.

051116 Deutsche Bank - October Containerboard Monitor and Numbers

Deutsche Bank - Equity Research

Shipments

Box shipment vol's rose 2.6% y/y. (This applies both on an actual and average week basis, since there was an equal number of shipping days.) September's y/y increase of 0.8% was the first positive comp in 6 months, and the October comp was the best since the summer of '04. On an YTD basis, box shipments are still down 1.0%.

Inventories

Inventory numbers dropped steeply in October, much more than typical. Inventories fell 186K tons compared to a 10-year average declined of 60K tons in October, suggesting a positive variance of 126k tons. This follows September's positive variance of 134K tons and takes inventories down to 2.18 million tons, the lowest level since late 1994.

Prices

Containerboard prices rose $30/ton in October, and Smurfit-Stone is already out with another hike initiative of $40/ton for December on export tonnage. These strong numbers make it much more likely that the industry will try to push through another hike on domestic tonnage. Moreover, these numbers will make it easier for producers to flow through the full $30/ton hike into box prices. With a sharp rise in input costs, there is no question that the industry needs higher prices to restore margins.

The Stocks?

These numbers affirm and strengthen our positive view on near-term prospects in the containerboard market. Last month, we upgraded SSCC (the most leveraged containerboard play) to a Buy and raised our target price from $12 to $15. We also remain positive on both PKG and TIN.

For more information, please click on the attached document.

051115 Deutsche Bank - Rock Tenn's F4Q in 100 words

Deutsche Bank - Equity Research

Rock-Tenn {Ticker: RKT.N, Closing Price: USD 13.25, Target Price: USD 18.00, Recommendation: Buy}.

Arguably met consensus = solid qtr, considering cost pressure. GAAP F3Q05 EPS = $0.14. Back-out specials & looks like $0.26. DB @ $0.25; FC @ $0.26. Comps a bit skewed since this was 1st full qtr w/ Gulf States: F3Q05 = $0.21; F4Q04 = $0.28. Pos's: Gulf States. Neg's: folding cartons, paperbd vol's, operating costs (fiber, energy, chemicals & freight).

Packaging. Still a very tough market. EBIT @ $11.8MM = +$1.2MM q/q and +$2.8MM y/y. Help from Gulf States plants offset weaker results at legacy RKT plants. Issues: Lower vol's, higher costs.

Displays/Corrugated. Still rebounding off F1Q05 lows. EBIT @ $7.2MM = +$0.8MM q/q and -$2.3MM y/y. This segment tends to be lumpy, but continued q/q growth is encouraging.

Paperboard. Solid, with strength at Gulf States offsetting weakness at recycled mills. EBIT @ $16.0MM = +$8.4MM q/q and y/y. Recycled vol's fell 16K tons (6%) y/y. Recycled operating rate fell y/y from 97% to 91%.

Others. (1) NDebt -$33MM in qtr to $876MM, (2) '06 pension exp. = about $15MM, (3) Capex: '05 = $54MM, '06 = $70MM (D&A = $100-105MM).

Change in view? Not really. Strength at legacy Gulf States assets continues to offset weakness in core paperboard & folding carton operations. RKT is financially rational, operates well & has reasonable valuation. Maintain Buy & $18/share price target. Trimming estimates slightly: FY06 goes from $1.00 & $0.95, and FY07 goes from $1.50 to $1.25.

For more information, please click on the attached document.

051114 Dr Paper's Pulse on Pricing

Deutsche Bank - Equity Research

MARKET PULP

Despite a $5/tonne list price increase in November, conditions appear unsettled. The big concern is the loss of pricing power in Europe and Asia. NA October NBSK prices were revised down $5/tonne; the November list price is now $640/tonne. A recent domestic hike could be in jeopardy if the European market does not tighten. Hardwood prices remain quite strong relative to softwood grades. September shipments for all grades rose 8.9% y/y and inventories fell 211k tons, a positive variance of 104k tons over the 10yr avg decline of 107k tons normally absorbed in September. Brazil's VCP announced a study for a 1MM/mt eucalyptus pulp mill; est. costs are $1.3B. Start-up is 4-5yrs off, but comes on the heels of Suzano's 1.25MM expansion announced in mid-October.

CONTAINERBOARD

Containerboard prices rose $30/ton in October, and Smurfit-Stone is already out with a $40/ton price hike for December 1 on exports. We think that this may be a precursor to another price initiative for domestic prices. THE KEY ISSUE NOW IS RAISING BOX PRICES. Producers have been struggling with low prices, and surging costs have driven margins under cash cost at higher cost mills. September inventories fell 164K tons vs. a 10yr average rise of 18k tons, a positive variance of 182k tons. This huge drop is primarily a result of Hurricanes Katrina and Rita which caused significant mill outage. Box shipments were up 0.8% y/y on an avg. week basis in September, the first positive y/y comp in several months.

LUMBER

Lumber prices rose modestly last week; the framing lumber composite increased $8/mbf to $358/mbf. After reaching $405/mbf post Hurricane's Katrina and Rita, lumber prices fell rather steeply the last 6 weeks. Last week, suppliers found some tightness and prices stabilized. Canadian trade and the housing market remain the 2 big issues. Import duties and a strong CN$ are making it difficult for some producers there to sell into U.S. markets. Both housing starts and building permits came in above forecast levels in September; October data will be released Thursday.

For more information, please click on the attached document.

051114 Deutsche Bank - Georgia Pacific

Deutsche Bank - Equity Research

Georgia-Pacific {Ticker: GP, Target Price: USD 48, Recommendation: Buy}.

Koch Industries is buying Georgia-Pacific for $48/share

When factoring in assumed debt, Koch is paying $21B. This makes the deal easily the biggest in the sector's history. Koch is paying roughly 7.7X on a 2005 EV/EBITDA. The deal is a testament to continued generous financing markets, but also to GP's improving balance sheet, strong cashflows, and the durability of earnings from the firm's huge consumer products operations. While both boards have approved the deal and financing is in place, we would not rule out an alternative bid.

No legal obstacles

While a deal of this scale is never a "done deal" until it closes, we don't see anything at the moment poses a big obstacle. With virtually no overlapping businesses, there are no antitrust concerns. There is a contingency around GP's asbestos liability, but it shouldn't prevent the deal from closing. Based on this announcement, we are moving our target price up to $48/share.

Other stocks that could feel ripples from this deal?

The transaction may again focus a bit of take-over attention on LPX. Other co's that could be impacted include WY, TIN, WPP, and PCH (not a DB coverage name @ present). WY and TIN are both interesting "sum of the parts" plays in the sector. The scale of the GP deal is apt to raise the specter of more large transactions. Small-cap Wausau is not well-covered, but has a very profitable and fast-growing AFH tissue franchise as well as specialty paper operations, timberland, and a clean balance sheet.

For more information, please click on the attached document.