Industry Reports

Deutsche Bank Reports Summaries

080128 Deutsche Bank Report - Newsprint Quarterly

Deutsche Bank - Equity Research

* Q3 results: close to the bottom

Q3 results were extremely weak.  With all players waiting for the AbitibiBowater merger to close, margins dipped to unsustainably low levels.  Looking ahead, 4Q is likely to be another difficult quarter, but 2008 should finally see margins rebounding.  With the merger closed and the expected capacity shuts announced, prices are now going higher.

* Demand decline still appears to be accelerating

Consumption at the U.S. dailies fell 10.8% y/y in 2007.  This compares to 7.1% in 2006 and 5.4% in 2005.  Soft circulation, narrower page widths, weak advertising lineage, and the removal/reduction of features like the stock tables are all part of the equation.  Overseas exports rose modestly in 2007 (+7.3% y/y), but constitute only 22% of shipments.

* Price & costs

After declining $115/mton over the course of 13 months, prices finally started to rebound in November.  Prices are up $40/mton from the bottom to date, with further hikes of $45/mton still in the market.  The biggest cost issue is the CN$.  4Q results will be impacted by a CN$ which averaged $0.04-0.05 higher q/q and $0.12-0.13 higher y/y.  Fortunately, the CN$ has eased from the mid-4Q peak of US$1.10 to “only” around parity.

* Further consolidation ahead?

AbitibiBowater completed its merger at the end of 3Q and promptly announced the closure of 515K mtons/yr of CN capacity for 1Q08.  White Birch recently announced an agreement to purchase SP Newsprint, which will make the new company the #2 player in NA.  We think further consolidation among the 2nd and 3rd tier players is essential.  ABH's Snowflake, AZ mill is apt to be the next move.

* Valuation/risk

Our $29 price target on AbitibiBowater is derived from our estimate of Normalized conditions, which we think the company will reach in 3 years.  We estimate that ABH will generate $275MM/year in free cash flow, place an 8x multiple on this, and discount the result back two years.  While our price target offers substantial upside to the current stock price, the stock has been highly volatile, and we are not inclined to become constructive while price, volume, and cost issues are so uncertain. Downside risks include the continued decline in newsprint demand, a weakening economy, and continued strengthening of the C$.  Upside risks include capacity rationalization leading to higher prices, and improving trade flows.