Industry Reports

Deutsche Bank Reports Summaries

060118 Deutsche Bank - Timber Tax

Deutsche Bank - Equity Research

* Will timber taxes come down?

Timber earnings are treated as capital gains, which means that currently, timber owned by individuals (directly or through a REIT) is taxed at 15%, while corporate timber earnings are taxed at 35%. The bill would reduce the rate for both individuals and corporations to 14%. We recently spent a day in Washington DC discussing the bill with various parties around the measure.

* Who would the bill benefit?

The biggest beneficiaries appear to be TIN, WY, and MWV. Weyerhaeuser's timberland EBIT averages $800MM/yr, so a drop in the tax rate from 35% to 14% looks like $162MM/yr at current levels. Temple doesn't report timber earnings as a separate item and has declined to put a number on the bill's impact. If Temple's 2MM/acres of land generates $50/acre/yr, the bill would yield $21MM/yr in tax savings. The savings would be similar for MWV.

* What won't the bill solve?

It doesn't create a truly level playing field among timber owners. C-corp timber earnings are still exposed to a double layer of taxation - at the corporate and shareholder levels. At the same time, many of the new owners of timberland (pension funds, endowments) are tax-exempt. If tax exempts want to own timber as part of their real estate portfolios, it's hard to compete with them. The bill also won't answer the question of hether "integrated" forest products companies like Temple, Weyerhaeuser, and MeadWestvaco are really the best optimizers of timberland.

* Will the bill become law?

The bill currently has 98 co-sponsors in the House. The Senate version currently has 16 co-sponsors. As one might expect, the bill has drawn its strongest support from the Southeast & South-central part of the US as well as the Pacific Northwest. Based on our conversations, we would handicap the prospects for passage of the bill in 2006 as about 1 chance in 3. The best scenario for the bill appears to be inclusion in a joint House/Senate tax reconciliation bill. If the bill's sponsor, Rep McCrery, is a member of the reconciliation committee, the prospects are probably a bit higher, perhaps "even money."

For more information, please click on the attached document.

060118 Deutsche Bank - Trading Places

Deutsche Bank - Equity Research

* Temple buys out Caraustar's interest in gypsum JV

Temple-Inland is buying out its partner, Caraustar, in a 2-mill gypsum wallboard joint venture (Standard Gypsum), which has 1.2B square feet of wallboard capacity. Temple is paying $150MM in cash and assuming $28.1MM in debt for CSAR's 50% stake.

* Nice deal for Caraustar

The deal implies a total enterprise value of $356.2MM for Standard Gypsum. We estimate that 2005 EBIT for Standard will come in at roughly $64MM. Add in another $4MM in depreciation, it looks like $68MM in EBITDA and a 5.2x multiple. While this multiple may appear modest, we regard it as healthy. Because the gypsum market has been very strong, we view Standard's 2005 results as "top of the cycle" or very close to it.

* Caraustar to use proceeds to reduce debt

CSAR will focus on near-term balance sheet repair. The company suggests that proceeds from the Standard sale as well as the proceeds from its proposed sale of 3 paperboard mills will be used to pay more than half of its existing long-term debt. The elimination of $29.5MM in letters of credit guaranteeing Standard's debt will free up availability under CSAR's bank lines.

* Caraustar may buy out TIN's interest in PBL

CSAR's debt reduction likely won't be permanent. The next event is resolution of TIN & CSAR's other joint-venture: Premier Boxboard. Premier is a 50/50 venture that produces light-weight gypsum facing paper as well as other types of recycled paperboard. We think CSAR will soon move to acquire TIN's share of Premier by yr-end. We think Premier's total enterprise value is apt to be in the $300MM range. The unwind of these 2 JV's is a bit of clean-up for both companies and should improve their strategic/market flexibility.

For more information, please click on the attached document.

060117 Dr Paper's Pulse on Pricing

Deutsche Bank - Equity Research

CONTAINERBOARD

Field reports suggest little questioning about January containerboard hike. Downstream box increase announcements have been appearing. Indeed, with supplies tight and costs up sharply, sources suggest that a March/April hike attempt is probable. The key issue is continued demand growth. Kappa Group and Jefferson Smurfit completed recently; we think they could shutter 500-700K tons of capacity. NA November box shipment and inventory data was positive. Y/Y increases in shipments rose 2.8% in November; inventories fell again and are at their lowest levels since 1994.

UNCOATED FREE SHEET

Producers have reportedly begun to announce cut-size hike announcements. This follows on earlier announcements for various converting grades. With "effective" operating rates in low 90's and further supply withdrawals probable, we think the UFS is near an inflection point. We're increasingly convinced that some combination of WY, DTC and Boise white paper businesses is inevitable - - - probably in the next 4-5 mo's. All 3 producers seem to recognize the need to act.

MARKET PULP

The market remains sluggish. Weyerhaeuser has announced February hikes in NA and Europe. However, January increase attempts by other producers appear to have mostly fallen flat. Prices are highest in NA, lowest in Asia, with European prices in the middle. Western Pulp will permanently close its 275K mtpy facility in Squamish British Colombia beginning Jan. 23rd further tightening the market. Many CN mills have been hurt by high energy prices and a strong CN$.

For more information, please click on the attached document.

060116 Deutsche Bank - Rayonier

Deutsche Bank - Equity Research

Rayonier {Ticker: RYN.N, Closing Price: USD 42.13, Target Price: USD 55.00, Recommendation: Buy}.

* Company visit leads to greater confidence in long-term value

We recently visited Rayonier and spoke with members of the senior management team, and we toured some of the company's high value landholdings in Northeast Florida. The overall takeaway from our trip is that we are even more confident that the stock represents compelling long-term value at current levels.

* The land that we saw had potentially very high value

A large parcel is much closer to Jacksonville than we realized - starting less than 20 miles from downtown Jacksonville and less than 10 miles from JAX international airport, due north along I-95. It is adjacent to a new development where homes are selling from the $300K's to the $500K's, and it has about 6 miles of frontage along the St Mary's River, with beautiful views of the river and the wetlands beyond.

* Regular timberlands and Performance Fibers continue to be steady

Although our estimate of $1,100/acre on the Southeast timberland is a bit higher than what some other analysts assume, there are multiple reasons (discussed below) why we remain confident that our estimate is not too high. In Performance Fibers, margins should be flat to up y/y in 2006, and the closure of Weyerhaeuser's Cosmopolis mill should help in the medium term.

* Valuation/Risks

Our $55 target price on Rayonier is based on a combination of net asset value and discounted cash flow. We think that RYN has net asset value of about $56/share, and our DCF valuation on the company implies $50/share, but on assumptions which we regard as quite conservative. Investment risks to Rayonier include the fundamentals of downstream wood products and pulp & paper businesses, the US- Canadian lumber dispute, success in executing its real estate strategy, interest rate fluctuations, and currency fluctuations.

For more information, please click on the attached document.