Industry Reports

Deutsche Bank Reports Summaries

060313 Deutsche Bank - Glatfelter

Deutsche Bank - Equity Research

Glatfelter {Ticker: GLT.N, Target Price: USD 20, Recommendation: Buy}.

They've been busy!

Less than 2 weeks after announcing the acquisition of NewPage's Chillicothe, OH mill, Glatfelter announced two separate transactions in the United Kingdom. They are buying J.R. Crompton's Lydney specialty mill in Gloucestershire for $65.1MM. Lydney had 2005 revenues of approximately $75MM. GLT announced a contingent agreement to purchase a Crompton mill located at Simpson Clough; the purchase price would be $21.7MM. 2005 revenues were $28MM.

Effect?

The two transactions announced today will significantly expand GLT's European footprint as well as its global position in long-fiber papers. GLT's EBITDA margin in the long fiber and overlay business was 13.5% and 16.1% in '05 and '04 respectively. Assuming similar margins on the $103MM in 2005 sales at the two Crompton mills would imply EBITDA growth between $14MM and $16.5MM.

Analysis

When taken with last month's purchase agreement for NewPage's Chillicothe mill in Ohio, the GLT story has changed. Any notion of a "take-out" or "going private" scenario is off the table --- at least for the moment. These acquisitions mark the firm's boldest step since the acquisition of Ecusta in the mid-80's. They also mark a turning point from several years of operational and balance sheet restructuring.

Valuation/Risk

It is not clear what impact the deal(s) might have on GLT's small teabag paper mill in France. Nor is it clear how these deals will mesh with GLT's European restructuring program. With a strong balance sheet and very modest purchase prices in all transactions, the downside risk appears manageable. At the same, with no additional financial information, we are maintaining our EPS estimate for '06 at $0.80 and our Buy target at $20. We expect to make appropriate adjustments as details are made public. Our target price represents approximately 90% of 10x our peak EPS estimate. We think the stock could reach 10x peak EPS, based on historical trading patterns, and we have chosen to discount this level by about 10% based on risks the company currently faces.

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060313 Dr Paper's Pulse on Pricing

Deutsche Bank - Equity Research

MARKET PULP

The pulp market rally continues as supply constraints and improving demand are both driving the market. Last week WY, Canfor, and Mercer announced $30/tonne hikes on NBSK for April; if fully implemented the list price will go to $690/tonne. NBSK inventories stands near 31 days/supply compared to 37 day/supply for NBHK. World shipments were up 6.5% y/y in January. The market is expected to become even tighter in the late spring with both BOW and WY closing NBSK lines in April and Fraser Papers closing a facility in May.

COATED GROUNDWOOD

Prices have been fairly static in recent months, however significant restructuring and closures by UPM could give producers pricing power here in NA. The decision by UPM to close up to 17% of its LWC capacity in W. Europe has major implications for the global market as W. Europe remains the only net exporter of that grade globally. According to DB's European Paper & Forest products analyst Mathias Carlson, currency movements have made export markets (especially those to NA) less profitable. In that same report DB cites about 500k tons of oversupply in W. Europe for 2006; the closures announced by UPM (and Stora in October) should help reduce this overcapacity.

UNCOATED FREE SHEET

The market continues to tighten as merchants are scrambling ahead of a 2nd round of price hikes. Most producers now have $60-80/ton hikes announced on both cut-size and offset grades for late March/early April. Prices on 50-lb offset rolls rose $45/ton in January and another $5 in February. The trade papers reflected $20/ton of improvement on UFS repro-bond grades in Feb. With "effective" operating rates in the low 90's and further supply withdrawals probable, UFS has turned. Demand has improved in recent months; January shipments rose 6.1% y/y. On the M&A front, our sources report that discussions among the 4 leading players have intensified. Some firms are reportedly cross-trialing production at their mills.

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060310 Dr Paper's Weekly Wrap Up

Deutsche Bank - Equity Research

Uncoated white paper is tight. Producers boosting cut-size prices $60-$80 in April. Capacity shuts & improving demand are drivers. Meanwhile, 4 big players in various UFS merger talks. Most likely in DB's view? WY w/ DTC or Boise. WY & IP reportedly talking, but deal seems unlikely.

The Scan's got religion - and it helped European & US equities this week. UPM reducing its CFS capacity by 12%, LWC capacity by 17%. Europe has been massively oversupplied. Closures could aid IP's sale of coated paper op's.

A watershed moment??? A big TIMO - Campbell Group - joins in unsolicited bid for LFB. With lots of cash chasing timber assets, could other TIMO's join in hostile bids for land-rich paper co's?

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060306 Dr Paper's Pulse on Pricing

Deutsche Bank - Equity Research

PANELS

The structural panel composite was down $4/msf last week to $364/msf. The benchmark grade of OSB (7/16" in the North Central region) was down $5/msf to $265/msf. In recent weeks pricing has been relatively stable. Last week a class-action lawsuit was filed against several of the largest producers of OSB, including WY and LPX. The suit alleges that producers conspired to inflate prices illegally. Producers have denied the allegation.

COATED FREE SHEET

Prices were flat in February. Coated free sheet demand improved 6.2% y/y in January after being down 0.8% overall in 2005. Sappi announced a $50/ton hike for NA last month. Most other producers have now followed. The announcements come despite concerns about lackluster demand. As elsewhere, most of the drive behind the hikes are higher costs and reduced supply (Cascades, Domtar, UPM, etc.). With operating rates around 84%, it is doubtful the industry has any pricing power.

UNCOATED FREE SHEET

The market continues to tighten as merchants are scrambling for offset rolls ahead of a 2nd round of price hikes. Most producers now have $60/ton hikes annouced on offset grades for late March/early April. Prices on 50-lb offset rolls rose $45/ton in January and another $5 in February. The trade papers reflected $20/ton of improvement on UFS repro-bond grades in Feb. With "effective" operating rates in the low 90's and further supply withdrawals probable, we think the UFS is near an inflection point. Demand has improved in recent months; January shipments rose 6.1% y/y. Some of Jan's rise might be attributed to inventory building, as inventories are at the lowest levels since late 2004.

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060303 Dr Paper's Weekly Wrap Up

Deutsche Bank - Equity Research

UFS going higher? Producers proposed $60/ton hikes on offset/converting grades for April. Cut-size hikes could follow. Jan's hike on offset grades was successful---UFS probably tighter than op. rates reveal.

BLL corp. agreed to acquire plastic container assets of Alcan---not commodity but barrier products. Price is $180MM. 2 wks ago they announced U.S. can asset purchases for $600MM. Could be more to come.

Flexible margins up? DB's chem. team sees resin prices falling again in March---would be down 20% vs. '05 peak. Prices correlate w/ Nat. gas. Benefits BMS, PTV, and SEE.

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