Industry Reports

Deutsche Bank Reports Summaries

071129 Deutsche Bank Report - Temple-Inland - What's Left?

Deutsche Bank - Equity Research

Temple-Inland {Ticker: TIN, Closing Price: USD 43.16, Target Price: USD 75.00, Recommendation: BUY}.

* A first look at new Temple-Inland

Management provided pro forma numbers for the new Temple-Inland (after the timberland sale and the spin-offs of Guaranty Bank and Forestar). Among the key "take-away" points were a strong desire to remain independent, continue improving relative financial performance and growing both the corrugated packaging and building products sides of the firm. We maintain our Buy rating as we believe the stock is cheap, with investors shying away from Temple's current exposure to real estate, banking and the industrial economy.

* Pro forma EBITDA lower than anticipated, but not a bad starting point

Total corporate EBIT thru September 30 was $125MM. Taking into account a weaker Q4 in building products, some pricing gains in corrugated packaging and reduced expense for share-based compensation, we think the FY07 pro forma EBIT will be in the range of $170MM. Add in $205MM in D&A and EBITDA should be in the $375MM range. How the market will value this EBITDA is uncertain.

* What is the starting point?

Adjusting for a surge in share based comp, '07 pro forma EBTIDA should be $390MM. Applying a 10.5X multiple, a slight premium to the peer group due to its depressed building products EBIT, the new TIN would trade at $30/share. Temple will also be paying a $10/share dividend by yr-end.

* Valuation & Risks

Our $75 price target is based primarily on our estimate of TIN's net asset value. Our price target is slightly below our estimated net asset value to account for near term cyclical pressures. We've also outlined a "Doomsday Scenario," which suggests a well-defensed value in the low $50s/per share. Temple-Inland's primary risk is that the economy stalls, putting renewed pressure on commodity prices. Other common industry risks include an increase in the $US, capacity growth abroad, interest rate risk, credit defaults (Guaranty), and higher energy costs.