Industry Reports

Deutsche Bank Reports Summaries

060404 Deutsche Bank - Bowater

Bowater {Ticker: BOW.N, Recommendation: Hold}.

Bowater has just named David Paterson as their new CEO, effective May 1st. Paterson has spent the past 19 yrs at Georgia-Pacific in a variety of roles, most recently running GP's Building Products Division. The announcement comes a bit earlier than we had expected. We were also a bit surprised by the choice. We thought that Bowater might well name an insider like David Maffucci or Don Newman to the post. Although Paterson is no stranger to producing & selling commodities, the newsprint & coated paper markets will be his first foray into publishing papers, as well as US/Canadian political issues.

Let's hope that David Paterson brings his "lucky touch" to Bowater. Paterson took the helm of GP's Building Products operations just as the plywood & OSB markets took off on one of their greatest cyclical rallies. Bowater could use some similar cyclical fortune. However, it is more likely that Bowater will need to create some of its own good fortune. Both Bowater's newsprint and market pulp operations face long-term structural issues. Bowater's leveraged balance sheet and weak cash flows further complicate the situation.

What can be done? We think some of the "Plan B" steps are already well underway. Bowater is selling its remaining 400K acres of southern timberland and we expect proceeds in the $300-325MM range. A settlement of the US/CN lumber dispute could soon result in Bowater receiving a partial (70-75%???) refund of the US$100MM+ in duties. Finally, there are assets like a fluff pulp business, Korean newsprint mill and 2 paper mills & extensive timberlands in the Canadian maritimes. It's a tough situation, but not hopeless. It will, however, require prompt action.

For more information, please click on the attached document.

060404 Thoughts on IP's Timberland Sales

Deutsche Bank - Equity Research

International Paper {Ticker: IP.N, Closing Price: USD 34.90, Target Price: USD 40.00, Recommendation: Buy}.

* IP sells bulk of timberland

* Use of Proceeds

Both transactions are expected to close in 3Q, with 20% being paid in cash and 80% paid with installment notes, which will trigger liability under the Alternative Minimum Tax. IP will have to pay about $400MM by year-end to satisfy this liability. IP is reiterating its previously disclosed breakdown for usage of net proceeds: 40-50% to reduce debt, 25-30% to return value to shareholders (most shareholders assume buy-backs), and 20-25% for selective reinvestments (we assume Asia, Brazil and Eastern Europe).

* Our Takeaway?

It is good news for IP shareholders, but also positive news for other timber-rich names. For IP, the mission will be "seizing the moment" from a financial and organizational standpoint and begin to remake the firm. Other timber-rich firms include Plum Creek and Rayonier as well as Temple-Inland and MeadWestvaco. All four names are currently Buy-rated by DB.

* Valuation/Risks

Our $40 target price is based upon 2.0x book value, 5.9x peak earnings, 10.7x normalized earnings, 4.6x peak EV/EBITDA, and 6.6x normalized EV/EBITDA. Most ratios are at slight premiums to the group averages. Historically, IP tends to command a premium to the group averages, based on its size, diversity, and consistency of earnings. Risks include economic momentum, capacity growth abroad as well as application of asset sale proceeds.

For more information, please click on the attached document.

060404 Deutsche Bank - International Paper

Deutsche Bank - Equity Research

International Paper {Ticker: IP.N, Target Price: USD 40, Recommendation: Buy}.

IP today announced the sale of 5.1MM acres of timberland for $6.1B. Including the smaller announcements last week, the land sales to date amount to 5.4MM acres for $6.5B. The remaining US land includes 300K acres in NY, 700K acres in the South that will be sold in smaller blocks, and 130K acres in the South not for sale (facilities land, expiring leases). Based on these transactions, IP is pushing its estimate of transformation proceeds up from $8-10B to $11B.

DB's initial take? We think this is good news. Our estimate of the total value of IP's US land was $7.0-8.0B, which was likely above consensus expectations. Based on these transactions, we think that the total transaction value will exceed the $7.5B midpoint of our expectation, and it may also exceed the $8.0B high end of our expectation. We think the 700K remaining acres in the South are likely to fetch higher value than typical timberland. While IP has not provided any specifics about location or HBU value, the fact that this land is being held back for sale later in smaller blocks suggests higher value than the timberland which will be sold in large blocks. We think $2,000/acre may be a prudent estimate for the value of this land, which implies $1.4B for the remaining land in the South. Add $100MM for the NY land, and the total reaches $8B. IP is filing an 8-K this morning, and we will follow up with a more complete note.

For more information, please click on the attached document.

060403 POP 4Q05 in 100 Words

Deutsche Bank - Equity Research

Pope & Talbot {Ticker: POP.N, Closing Price: USD 5.09, Target Price: USD 5.00, Recommendation: Hold}.

* Even weaker than expected

Reported 4Q EPS = $(2.07). Net of special items ($22.3MM valuation allowance on US deferred tax assets and $3.5MM gain on BC take-back of timber harvesting rights), it looks like $(0.82). DB & FC @ $(0.65). Comps: 3Q05 = $(0.54); 4Q04 = $(0.16). Other negatives include auditor's doubt about POP's sustainability as "going concern" and finding of an internal control deficiency.

* Liquidity is key issue

POP would already be in breach of certain covenants, but for certain waivers. POP negotiating refinance of revolvers & other credit agreements - announcement is expected in 2Q. Covenants should be less restrictive, but interest expense will increase significantly.

* View?

POP faces serious challenges, but low stock price offers option value from high financial & cyclical leverage. Pulp markets are rebounding, and lumber remains steady. Financial distress poses big risks, but potential positive catalysts include successful refinancing and favourable resolution of the lumber dispute. Maintain Hold. Adjusting est.: '06 goes from $(0.65) to $(0.90) [1Q = $(0.60)], '07 goes from $(0.50) to $(0.10).

* Valuation?

Trimming target price from $8 to $5 on higher risks from financial distress. Our $5 price target assumes just 2.5x. The major risks to Pope & Talbot include strength in the C$, as well as the long-term outlook for the North American pulp business.

For more information, please click on the attached document.

060403 Dr Paper's Pulse on Pricing

Deutsche Bank - Equity Research

CONTAINERBOARD

The April $50/ton hike will be the most challenging to date. High prices have led some new entrants into the market and some export volumes have shifted home. Two-tiered price differentials between recycled and virgin c'board of up to $50/ton will make April's hike more difficult. While closures have tightened the NA market, European shuts by Smurfit-Kappa, SCA and DS Smith should help tighten the global market. February box shipments were up 3.6% y/y and inventories remain at low levels, all signs that an economic pickup is real.

MARKET PULP

The pulp market rally continues as supply constraints and improving demand are both driving the market. Many producers have announced $30/tonne hikes on NBSK for April; if fully implemented the list price will go to $690/tonne. NBSK inventories stand near 29 days/supply compared to 36 day/supply for NBHK. World shipments were up 2.9% y/y in February. The market is expected to become even tighter in the late spring with both BOW and WY closing NBSK lines in April. GP and Fraser Papers are both shuttering hardwood facilities in New England. Producers have slated NBHK price hikes for April to narrow the price gap with BEK.

PANELS

The structural panel composite fell from $376/msf to $369/msf. The benchmark grade of OSB (7/16" in the North Central region) was down $25/msf to $265/msf. In recent weeks pricing has been relatively stable. Last month 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.

For more information, please click on the attached document.