Canada Research Ainsworth Lumber Co. Ltd.

Transcription

Canada Research
Published by Raymond James Ltd.
June 3, 2013
Ainsworth Lumber Co. Ltd.
ANS-TSX
Company Report - Initiation of Coverage
Daryl Swetlishoff CFA | 604.659.8246 | daryl.swetlishoff@raymondjames.ca
David Quezada CFA (Associate) | 604.659.8257 | david.quezada@raymondjames.ca
Rating & Target
Target Price (6-12 mos):
Current Price ( May-30-13 )
Total Return to Target
52-Week Range
Suitability
Forest Products | Building Materials
The Best Defence is a Good Offence
Event
We are initiating coverage of Ainsworth Lumber Co. (“Ainsworth Engineered”
or “Ainsworth”) with a Strong Buy rating and $5.30/share target price.
Recommendation
We advocate investors buy Ainsworth shares, highlighting strong leverage to
the US housing recovery and a weaker C$ and note we forecast strong EBITDA
growth despite a moderating commodity outlook. Strong free cash flow yields
and an inexpensive valuation further backstop our Strong Buy rating.
Analysis
Ainsworth Engineered has undergone a transformation with new management
in place, a revitalized balance sheet, and uncompetitive assets now curtailed or
divested. Our bullish stance reflects its higher relative margins - a function of a
rare combination of low cost structure coupled with a production focus on
premium-priced value added products. This advantage is further augmented by
attractive productive expansion opportunities and an industry leading presence
in offshore markets. We note Ainsworth’s OSB mill in High Level, Alberta is
expected to come online in mid-2013, adding ~50% capacity from current
levels. This, in addition to capital plans at the company’s operating mills and a
75% complete additional line at the Grande Prairie, Alberta OSB facility, imply
Ainsworth has the potential to nearly double production from the current 1.68
bln msf. Based on our estimates the company trades at a material discount to
OSB comps, something we expect to normalize as production levels rise and
strong expected near-term cash flows facilitate further deleveraging.
Our supply-demand analysis of North American OSB markets leads us to expect
near-term strength in pricing (due to improving US housing markets) to give
way to pressure from significant amounts of OSB capacity restarts beginning
later this year. Nevertheless, we believe relatively strong OSB prices of
US$350/msf and US$330/msf in 2013E and 2014E, respectively, to be sufficient
for Ainsworth to post strong EBITDA growth as the company’s capacity restarts
and other expansion projects offset declining commodity prices. We highlight
that OSB demand is highly levered to US housing assumptions and even
modestly higher activity levels could result in higher than forecast pricing.
High Risk
Market Data
Market Capitalization (mln)
C$882
Current Net Debt (mln)
C$227
Enterprise Value (mln)
C$1,109
Shares Outstanding (mln, f.d.)
242.9
10 Day Avg Daily Volume (000s)
630
Dividend/Yield
C$0.00/0.0%
Key Financial Metrics
2012A
2013E
2014E
P/E
13.1x
6.7x
5.6x
EV/EBITDA
10.4x
4.7x
4.1x
NC 7/16" OSB (US$/msf)
US$270
US$350
US$330
Net Debt (%)
20%
Company Description
Ainsworth is a leading North American OSB panel
producer with three OSB mills in western Canada and
one in Ontario. Ainsworth's total current capacity is
2.54 bln msf of OSB and the company sells its products
to both North American and offshore markets.
Valuation
Our $5.30/share price target is based on a 5.6x 2014E EV/EBITDA multiple, inline with our target multiple for competitor Norbord at 5.7x.
EPS
2012A
1Q
Mar
C$0.01
2Q
Jun
C$(0.11)
3Q
Sep
4Q
Dec
Full
Year
Revenues
(mln)
EBITDA
(mln)
C$0.32
C$0.06
C$0.28
C$409
C$107
2013E
0.15A
0.15
0.11
0.13
0.54
566
236
2014E
NA
NA
NA
NA
0.64
716
270
Source: Raymond James Ltd., Thomson One
Please read domestic and foreign disclosure/risk information beginning on page 36 and Analyst Certification on page 37.
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Strong Buy 1
C$5.30
C$3.63
46%
C$4.31 - C$0.74
Canada Research | Page 2 of 47
Table of Contents
Investment Overview.......................................................................................................................... 3
Company Overview............................................................................................................................. 4
Company Strategy............................................................................................................................... 7
OSB Supply-Demand Outlook ............................................................................................................. 12
Share Ownership Overview ................................................................................................................ 14
Financial Analysis & Outlook............................................................................................................... 15
Valuation & Recommendation ........................................................................................................... 18
Appendix I: Management & Board of Directors ................................................................................. 20
Appendix II: Risks ................................................................................................................................ 22
Appendix III: OSB Industry Background .............................................................................................. 23
Appendix IV: Ainsworth Financial Statements .................................................................................... 32
Investment Overview
High leverage to US housing rebound and C$ weakness – Ainsworth Engineered has
successfully reorganized; recapitalizing its balance sheet and shedding uncompetitive
assets. The company currently operates three oriented strand board (OSB) facilities with
a combined capacity of 1.68 bln sf. We believe each of these facilities to be in the first
quartile of North American mills in terms of cash costs – a function of the company’s
average mill capacity (including the soon to restart High Level mill) which is ~25% higher
than the industry average. These assets provide strong leverage to the US housing
rebound and we estimate each additional 100,000 US starts (relative to our 1.15 mln
2014 forecast) translates into $62 mln in additional EBITDA, implying a potential 25%
increase to our target (holding all else constant). Earnings are also sensitive to the
bilateral exchange rate with each US$/C$ penny decrease (relative to our US$/C$ 0.98
assumption) increasing EBITDA by ~$8 mln, implying a potential 3% increase to our
target.
The best defence is a good offence – While we expect industry capacity restarts to
pressure OSB operating rates and pricing, we see Ainsworth’s own capacity expansions
supporting earnings growth. Ainsworth has announced a ~50% increase in company
capacity, outstripping the ~20% in industry-wide capacity restarts. The key restart is an
OSB facility in High Level, Alberta which is a large (860 mln msf) and relatively new mill
that first began production in 2000 before being idled in December 2007 due to the
severe US housing downturn. Following the announced mid-2013 restart, the mill will
have a product line complementary to the existing offering and regional footprint. In
addition, Ainsworth is currently in the midst of de-bottlenecking its existing three mills
leading to a 100 mln msf, or ~6%, increase of capacity. In addition, while not currently in
our earnings estimates, we highlight that Ainsworth maintains potential for further
expansion at the company’s Grande Prairie mill in the form a 600 mln sf second line
(which was shelved during the industry downturn). We understand that the project is
75% complete and would require a capital investment of ~$80 mln to finish. This second
line features a state of the art continuous press design and would be complementary to
the operations of the mill’s other line. If completed, the Grande Prairie facility would
boast a mammoth 1.33 bln msf of capacity and boost Ainsworth’s total potential
capacity to 3.24 mln msf – nearly double current operating levels.
Value-added product mix also supports margins – In addition to being a low cost
producer, Ainsworth boasts a valued-added product mix and diversified sales channels
(higher realized prices on export shipments) which have enabled the company to realize
mill nets above reported benchmark pricing and generally outperform competitors in
terms of margins. In fact, we highlight Ainsworth maintained positive EBITDA margins in
2009 when competitors were incurring substantial cash losses and the company has a
rolling three year average EBITDA margin of 17%, as compared to competitor’s average
of 11%. The company has also demonstrated that it participates in industry up-swings
as well, with margins in-line with or better than peers in more robust markets.
Attractive valuation – Historically a highly levered company, a 2008 restructuring and
4Q12 refinancing have reduced net debt to very manageable levels of just 20% of total
capitalization (8.5x 2013E interest coverage ratio). However, despite the company’s
strong competitive position, Ainsworth trades at a marked discount to the company’s
direct comps, Norbord and Louisiana Pacific. In fact, based on our 2014 EBITDA estimate
of $270 mln, we highlight Ainsworth is trading at 4.1x 2014 EV/EBITDA while Norbord
and Louisiana Pacific trade at 6.1x and 6.4x, respectively. We attribute this mainly to
Ainsworth’s smaller market capitalization and trading liquidity. We expect the company
to benefit from a catch-up in valuation with +50% capacity increases supporting higher
EBITDA and free cash flow generation – even with lower forecast commodity pricing.
Specifically, we are forecasting 2013/14 EBITDA of $236 mln and $270 mln, with FCF
yields of 15% and 20%, respectively, despite a $20/msf drop in OSB pricing. We peg
Ainsworth’s cumulative FCF in 2013E/2014E of ~$310 mln or $1.28/share, which we
believe justifies our 5.6x 2014E EV/EBITDA multiple – (in-line with bigger cap player
Norbord) implying a $5.30 per share target price.
RJL supply-demand model forecasts flat to lower average OSB pricing – Our analysis of
OSB supply and demand involves applying a one-factor power relationship to convert
our US housing start forecasts to OSB demand. We then estimate effective North
American OSB industry capacity by factoring in what we believe to be a conservative
ramp-up of the roughly 20% increase in announced industry mill restarts. Based on
these inputs, we arrive at effective North American operating rates of 91%, 90%, and
91% in 2013E-2015E, respectively. We then use a one-factor exponential relationship to
convert operating rates to OSB pricing forecasts of US$350/msf, US$330/msf and
US$345/msf in 2013-2015. We highlight that our forecast for lower pricing next year is
sensitive to our US housing start assumption. Operating rates and OSB pricing would be
flat next year should US starts average 1.25 mln, less than 10% higher than currently
forecast.
Leader in offshore markets, looking to develop opportunities abroad – While OSB is
typically produced and shipped within North America, Ainsworth is more diversified in
terms of geographical distribution of shipments, maintaining a market leading position
in Japan and actively advancing opportunities in the Chinese market. As it currently
stands, roughly 12% of Ainsworth’s sales go to export markets. With several mills
located in western Canada, we regard the company as uniquely positioned in terms of
shipping distance to Asia relative to other concentrated pockets of OSB supply in the US
south and eastern Canada. We highlight Japan represents a unique opportunity in the
sense that OSB only has a ~5% share of the structural panel market (the remainder
being plywood and particle board) which compares to 60% in North America. Clearly,
increased Asian market penetration represents a significant opportunity for the
company, in our view.
Ainsworth a potential takeout candidate – Given the company’s low cost asset base,
attractive product offering, expansion opportunities in Asian markets, and accumulated
US tax loss carry forwards (the company no longer operates in the US) we regard
Ainsworth as an attractive takeout candidate. Due to the Brookfield ownership link in
both companies we see Norbord as the most likely acquirer but also see potential for US
panel producers such as Louisiana Pacific or Georgia Pacific as potentially being
interested parties.
Company Overview
Ainsworth Engineered is the 5th largest producer of OSB in North America with four
facilities and a total capacity of 2.54 bln msf annually (including the idled High Level,
Alberta mill which is scheduled to restart mid-2013). The company’s facilities are
located in Canada with three in western Canada and one in eastern Canada, strategically
placed according to wood supply and access to markets (see Exhibit 1 - RHS). In 2012
these facilities employed some 600 people. By geography, Ainsworth’s primary end
market is western North America which represents 58% of the company’s total
shipments, followed by the mid-western portion of the continent (the mid-western US
plus Manitoba and Ontario) at 21% while also sending 12% of production offshore (see
Exhibit 1 - LHS). Of Ainsworth’s overall sales, roughly 45% are commodity performance
rated sheathing used primarily in roofs and walls in North American residential
construction while the remaining 55% is value-added OSB products. The valued added
product line is a strategic focus for Ainsworth and includes engineered wood products,
export grade products, residential value-add, and industrial (see Exhibit 2). These value
added products typically command a premium price while exhibiting reduced price
volatility. On a consolidated basis, Ainsworth has long-term fibre supply arrangements
covering 95% of its requirements.
Exhibit 1: Ainsworth 2012 Shipments by Geography (LHS) and Mill Locations (RHS)
Source: Ainsworth Lumber Co. Ltd.
Exhibit 2: Ainsworth Sales Volume by Product Line
1
Value represents mill return
Company Assets
100 Mile House, British Columbia – Opened in 1994, Ainsworth’s mill in 100 Mile
House, British Columbia has an annual capacity of 440 mln msf/yr. The mill’s key
products include JAS certified OSB (which meets Japan’s stricter structural standards),
webstock, rimboard, and commodity sheathing OSB. Based on 2012 shipments the mill
sends 63% of its product to North America while the remaining 37% is exported. The
mill produces 28% commodity OSB and 72% value added product. In 2010, the
company completed a major dryer improvement project at the mill which enhanced its
capabilities in processing logs killed by the mountain pine beetle. The 100 Mile House
mill has long-term fibre supply agreements in place which cover 100% of its
requirements.
Grande Prairie, Alberta – At 730 mln msf, Ainsworth’s Grande Prairie, Alberta mill is the
company’s largest currently operating facility. The mill opened in 1996 and features a
12’ wide multi-opening press. The Grande Prairie compound also includes a potential
second 600 mln msf line which features state of the art continuous press design and
would be complementary to the mill’s first line. This second line was 75% complete
when construction was halted due to industry conditions and requires an $80 mln
capital investment to bring it online. The existing line at Grande Prairie currently
produces commodity sheathing, flooring, JAS certified, and Chinese core stock OSB
products with 94% of shipments being sent to North American markets. The mill’s
commodity to value added product split is 59%-41%. The Grande Prairie mill has longterm fibre supply agreements in place which cover 100% of its requirements.
Barwick, Ontario – Ainsworth’s only mill in eastern Canada is located in Barwick,
Ontario and maintains an annual capacity of 510 mln msf. The mill was opened in 1997
and Ainsworth purchased it from Boise. The mill produces commodity sheathing (41% of
output) as well as value added products (59%) including flooring, webstock, and RV
(Jumbo) OSB products. The mill’s output is exclusively shipped within North America.
The Barwick mill has long-term fibre supply agreements in place which cover 73% of its
requirements with the remainder being purchased in the open market.
High Level, Alberta – Currently idled, Ainsworth’s mill in High Level, Alberta first opened
in 2000 before shutting in December 2007. The company purchased the remaining 50%
it didn’t own from prior joint-venture (JV) partner Grant Forest Products in 2011 and
plans to restart the mill by mid-2013. Once running, the mill’s 860 mln msf capacity
would represent a ~50% increase to the company’s total capacity and would produce
commodity sheathing, flooring, JAS, Chinese core stock, and webstock and it would also
complement Ainsworth’s existing markets and product lines. The High Level mill has
long-term fibre supply agreements in place which cover 100% of its requirements.
Company History
Ainsworth Lumber was first formed in 1952 by David Ainsworth and his brother Tom
who settled in British Columbia’s Caribou country and set up a small sawmill that had
been towed in by truck. By 1955 the company had moved to 100 Mile House, BC and
established a planer and larger sawmill facility. Throughout the 60’s the Ainsworth
family pioneered the use of smaller diameter (as opposed to old growth large diameter
logs) as a renewable source of fibre. During the 70’s and 80’s the company established
and acquired several solid wood processing facilities but did not move into structural
panels until the establishment of a specialty plywood facility in Savona, BC. In 1990
Ainsworth began its move into the OSB business, being awarded the timber supply for a
proposed OSB plant in 100 Mile House which was eventually opened in 1994, two years
after the company’s IPO in 1992. The company’s next OSB facility, located in Grande
Prairie, Alberta, was opened in 1995, and as part of a joint-venture with Grant Forest
Products the High Level Alberta mill was opened in 2000. In 2004, Ainsworth expanded
significantly, acquiring three OSB mills in Minnesota and the Barwick, Ontario mill. At
the time the company’s OSB capacity was 3.3 bln msf, making Ainsworth the 4th largest
producer in North America. By 2008, driven by the precipitous drop in the US housing
market, the company was forced to recapitalize (details follow) in order to survive the
industry downturn. In late 2007 the High Level mill was idled, and during 2008 and 2009
the Minnesota mills were permanently closed. In 2011, Ainsworth sold its Chasm
sawmill, marking the company’s exit from the lumber business. In September 2011
previous CEO Rick Huff retired as President and CEO, and Jim Lake was appointed
President and COO before assuming the role of President and CEO in March 2013.
Recapitalization
In July 2008 Ainsworth was forced to recapitalize as the company was burning cash
(losing $44 mln in EBITDA over the previous 12 months), had roughly $1.0 bln in debt
incurred financing some of the above noted acquisitions, had limited liquidity, and was
faced with the prospect of being unable to meet obligations to creditors. The
recapitalization featured a US$200 mln cash injection through the issuance of new
senior unsecured notes and the cancellation of all the former senior unsecured notes in
exchange for the issuance of an additional US$150 mln of new senior unsecured notes.
The recapitalization enabled Ainsworth to bring debt back to more manageable levels
while providing necessary liquidity to weather the remainder of the industry downturn.
As part of the debt exchange in the recapitalization, bondholders received 96% of the
equity in the new entity while long-term debt was reduced by ~$440 mln. The
Ainsworth family lost the majority of their ownership stake at this time. While industry
conditions certainly contributed to the need for a recapitalization, the company’s 2004
acquisition of three higher cost OSB mills in Minnesota for US$458 mln was also a
significant factor, in our view.
After the recapitalization the Ainsworth family exited management and the company
focused on divesting or closing all uncompetitive/high cost assets. At the time the
company had seven operational facilities (five OSB mills and two plywood/veneer
facilities) – this was eventually reduced to three operating OSB facilities.
Company Strategy
Diversified sales channels, geographical distribution, focus on value added products –
With 55% of Ainsworth’s shipments being value added products, the company has
consistently seen price realizations surpass prevailing benchmark prices (see Exhibit 3).
In fact, over the past 4 years we estimate the company’s realized prices exceeded 7/16”
OSB (del West) prices by an average of 7%. Importantly, these favourable mill nets have
not come at an increased production cost and we therefore believe this, in addition to
the company’s high quality mills, has contributed to margins outperforming comps. In
fact, we note among major panel producers Ainsworth was the only one to avoid
material cash losses in the first half of 2009 and has seen EBITDA margins exceed
competitors such as Norbord and Louisiana Pacific by approximately 6% over the past 3
years while maintaining an average EBITDA/msf produced of $47/msf as compared to
Norbord at $32/msf and Louisiana Pacific (OSB segment) at $28/msf. In addition to the
higher, more stable prices realized for Ainsworth’s value added products we attribute a
portion of these strong price realizations to the company’s presence in the Japanese
market, where product is also sold at a premium and enjoys reduced volatility.
Exhibit 3: Ainsworth Average Price Realizations vs. OSB (del. West) Prices
450
US$/msf (del US West)
400
350
300
250
200
150
100
50
7/16-Inch South (West)
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
4Q10
3Q10
2Q10
1Q10
4Q09
3Q09
2Q09
1Q09
0
ANS Average Sales Realizations
Source: Forest Economic Advisors (FEA), Raymond James Ltd., Ainsworth Lumber Co. Ltd.
Large, low cost mills contribute to margins outpacing comps – We regard Ainsworth’s
OSB mills as large and modern relative to competitors, with each of the company’s three
operating mills in the top quartile in terms of cash costs. As a result of this, we highlight
the company’s EBITDA margins have outpaced the OSB segments of competitors
including Norbord and Louisiana Pacific in recent years (see Exhibits 4 and 5). While
Norbord is likely the North American industry’s low cost producer, we attribute this to
the company’s focus on commodity sheathing products whereas Ainsworth produces a
more value added product offering. Furthermore, Ainsworth’s mills are sufficiently
flexible that each is able to produce the company’s whole product line, lending a further
advantage. Historically, Ainsworth’s strong competitive position has sheltered margins
during industry downturns with the company’s mills maintaining higher average
operating rates as was seen in 2008-2009 when the company’s three operating mills
essentially ran at full capacity while other producers were forced to take downtime.
Ainsworth’s large 860 mln msf/year OSB mill in High Level, Alberta is currently
progressing well towards resuming operations in the second half of 2013 and we note
the facility was operated on care and maintenance since its curtailment, which the
company expects to facilitate a smooth restart. The addition of High Level alone would
increase Ainsworth’s production capacity by 50%. Beyond the High Level restart,
Ainsworth would also be able to expand production by a further 600 mln msf annually
by completing the second line at the company’s Grande Prairie mill. This second line,
which is ~75% complete, features a continuous press design and will boast a cost
structure comparable to the company’s existing asset base, in our view. Ainsworth
estimates a capital cost of roughly $80 mln to complete the line. In addition to these mill
restarts Ainsworth is currently in the process of adding 100 mln msf to the company’s
operating facilities at a capex spend of $10 mln distributed evenly between 2013 and
2014.
Exhibit 4: Ainsworth Rolling 4 Quarter EBITDA/msf Shipped vs. Competitors
`
120
100
EBITDA/msf
80
60
40
20
0
-20
3Q12
4Q12
3Q12
4Q12
1Q13
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
4Q10
Norbord
2Q12
Ainsworth
3Q10
2Q10
1Q10
4Q09
3Q09
2Q09
1Q09
4Q08
-40
Louisiana Pacific
Source: Company Reports, Raymond James Ltd.
Exhibit 5: Ainsworth Rolling 4 Quarter EBITDA Margins vs. Competitors
40%
EBITDA Margin (%)
30%
20%
10%
0%
-10%
Ainsworth
Norbord
Louisiana Pacific
Increased capacity and shipments to offset moderating commodity prices – Consistent
with our view of increased industry-wide capacity putting pressure on OSB prices, we
assume average pricing falling to US$330/msf in 2014 from US$350/msf in 2013. While
this will negatively impact margins for all OSB producers, we highlight Ainsworth is in a
position to increase shipments by a greater proportion (see Exhibit 6) by bringing on
additional capacity. In other words, we expect Ainsworth to show revenues increasing
from $566 mln in 2013 to $716 mln in 2014, and EBITDA growing from $236 mln to $270
mln. Importantly, we highlight the mills Ainsworth can bring online are competitive in
terms of cash costs meaning, once the respective ramp ups are complete, the company
will still demonstrate low average cash costs and benefit from improved absorption of
fixed costs, in our view.
1Q13
1Q12
4Q11
3Q11
2Q11
1Q11
4Q10
3Q10
2Q10
1Q10
4Q09
3Q09
2Q09
1Q09
4Q08
-20%
Exhibit 6: Capacity by Mill (LHS) and OSB Price Estimates (RHS)
500
3,500
450
3,000
Grande Prairie II
2,500
350
2,000
Grande Prairie I
1,500
1,000
Barwick
500
100 Mile House
US$/msf
High Level
300
250
200
NC 7/16" OSB Prices
150
100
2013 RJL OSB Price
Forecast
50
2014 RJL OSB Price
Forecast
Nov-14
Jul-14
Sep-14
May-14
Jan-14
Mar-14
Nov-13
Jul-13
Sep-13
May-13
Jan-13
Mar-13
2016E
Nov-12
2015E
Jul-12
2014E
Sep-12
2013E
May-12
2012
Jan-12
0
0
Mar-12
mln msf
RJL Forecast
400
Source: Ainsworth Lumber Co. Ltd., Raymond James Ltd.
Leverage to US Housing Market – Ainsworth is highly leveraged to the US Housing
market. We regard this as a key element of our investment thesis as, while challenges
certainly remain, we have conviction the US housing market is currently in the early
stages of a legitimate recovery (see Appendix III for additional details). Moreover,
referring to Exhibit 7 (top right), we note OSB demand maintains a high correlation with
US housing starts at approximately 99.2% since 2005 while the commodity price, which
is clearly also impacted by changes in capacity, maintains a still material 52% correlation
with US housing starts (Exhibit 7, top left). Taking this argument a step further, we also
highlight the strong relationship between Ainsworth’s share price and OSB prices (55%
correlation) (Exhibit 7, bottom left) while also noting the commodity price is a primary
driver of the company’s margins (Exhibit 7, bottom right). Putting this together, we
estimate each incremental 100,000 US starts translates into $62 mln in additional
EBITDA, implying a potential 25% increase to our target (holding all else constant).
Exhibit 7: Ainsworth Leverage to OSB Pricing and the US Housing Market
2500
600
2.5
Benchmark OSB Prices vs. US Housing Starts
500
100
0
Oct-12
1.5
21.0
1
16.0
0.5
11.0
Mar-13
May-12
Jul-11
Dec-11
Feb-11
Apr-10
Sep-10
Nov-09
Jan-09
26.0
ρ = 99.2%
0
6.0
2005
2006
Total USHS (RHS)
500
ANS Share Price vs. OSB Pricing
4.50
450
4.00
400
3.50
450
350
ρ = 55%
3.00
2007
2008
2009
2010
Total NA OSB Demand (RHS)
300
2.50
250
US$/msf (del US West)
5.00
Jun-09
Aug-08
Oct-07
Mar-08
May-07
Jul-06
Dec-06
Feb-06
Apr-05
Sep-05
Nov-04
Jan-04
Jun-04
0
2011
2012
2013E
Total US Housing Starts
0.5
OSB Prices vs. ANS EBITDA Margins
400
0.4
350
0.3
300
0.2
250
0.1
200
0
150
-0.1
ANS Share Price
NC 7/16" OSB Prices (RHS)
7/16-Inch South (West)
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
4Q10
3Q10
2Q10
1Q10
4Q09
3Q09
2Q09
1Q09
4Q08
3Q08
2Q08
1Q08
May-13
Jan-13
Mar-13
Nov-12
Sep-12
Jul-12
May-12
Mar-12
Jan-12
Sep-11
Nov-11
Jul-11
Mar-11
May-11
-0.4
Jan-11
0
Nov-10
0
Jul-10
-0.3
0.00
Sep-10
50
May-10
50
Jan-10
-0.2
0.50
Mar-10
100
Sep-09
100
Nov-09
1.00
Jul-09
150
May-09
200
1.50
Jan-09
2.00
Mar-09
C$
000's SAAR
1000
200
US$/msf
US$/msf
1500
300
2
OSB Demand (bln msf)
2000
ρ = 52%
400
US Housing Starts (mlns SAAR)
500
NC 7/16 OSB
31.0
Total North American OSB demand vs. US Housing Starts
ANS EBITDA Margin (% - RHS)
Source: Company Reports, Raymond James Ltd., Random Lengths, US Census Bureau, APA-The Engineered Wood Association (APA), Capital IQ
Expansion in offshore markets – While OSB produced in North America is not generally
exported in meaningful quantities (4% of North American OSB production was exported
in 2012), Ainsworth is unique in that the company has a long standing presence in
Japan, sending ~10% of shipments to the country. While returns on North American
shipments are typically higher at US housing cycle peaks, Ainsworth’s JAS certified
product shipped to Japan is the company’s highest return product throughout the cycle,
while also exhibiting less price volatility than North America. As a result, Ainsworth has a
goal of doubling shipments to the Asian region (with shipments as a % of total capacity
to the region holding firm at roughly 12% while the company’s capacity potentially
doubles between 2013-2015/16). The domestic plywood industry in Japan is subsidized,
which represents a barrier to OSB substitution; however, Ainsworth is also attempting
to introduce OSB as an alternative to certain particleboard products. We believe
Ainsworth’s competitive strength in the Japanese market is a product of the company’s
long standing presence (customers feel the company is more reliable than panel
producer competitors who pulled out of the market during previous downturns),
western Canadian mill locations, and high quality standards.
Referring to Exhibit 8 below, Japanese housing starts did not decline as severely as did
those in the US and have improved modestly from recessionary lows rising 15%
between 2009 and 2012. More recently, 2012 housing starts improved 6% y/y while
1Q13 starts are up 5% y/y and March 2013 starts were up 7% y/y. We understand this
recent improvement is the result of improved consumer sentiment and economic
strength while pending consumption sales tax changes are also encouraging some
buyers to enter the market before they are implemented. The consumption tax will rise
from 5% currently to 8% in April 2014 and 10% in 2015. We believe the current strong
demand from Japan for building materials will persist throughout 2013 and 2014 and
expect Ainsworth will continue to make inroads into this and other export markets.
Exhibit 8: Japan Housing Starts
0.25
1.40
Japan Annual Housing Starts (mlns)
Japan YTD Housing Starts
1.20
0.20
mln units
mln units
1.00
0.80
0.60
0.15
0.10
0.40
0.05
0.20
-
2004
2005
2006
2007
2008
2009
2010
2011
2012
1Q12
1Q13
Source: www.estat-go.jp
OSB Supply-Demand Outlook
Lower – Though Still Decent – Future OSB Pricing on Tap – We apply a one-factor
power relationship (R2=0.93%) to convert our US housing forecasts to OSB demand.
Taken with our effective capacity assumptions described above, our OSB
supply/demand model predicts effective operating rates increasing from 84% in 2012 to
91% this year as 16% shipment growth outstrips a 7% increase in effective capacity. We
use a one-factor exponential relationship (R2=0.82%) to convert effective operating
rates to OSB prices.
This results in our US$350/msf 2013 price forecast. In 2014E, a 10% forecast increase in
OSB shipments is overwhelmed by a 12% increase in effective capacity resulting in
effective operating rates falling to 90% and our OSB price forecast falling to
US$330/msf. In 2015E, 8% shipment growth offsets an assumed 6% increase in effective
capacity, resulting in a 91% operating rate and a price forecast of US$345/msf (see
Exhibit 9). We caution that our OSB pricing forecasts are sensitive to our US housing
outlook and note that a < 10% increase in 2014 US housing activity results in flat
operating rates (relative to 2013) and a flat resulting commodity price outlook.
While there are likely permanent closure candidates among the 3.4 bln sf of remaining
idled mills, it is interesting to investigate the supply/demand balance assuming the full
27 bln msf of capacity operates. Trend levels of US housing starts of 1.5 mln, which
occur in 2016E in our forecast, would result in an 86% operating rate and trend pricing
of US$300/msf. Under this scenario, to keep operating rates at 91% and pricing at the
US$350 level would require US housing to average 1.75 mln – a low probability event, in
our view.
NC 7/16" OSB Prices vs Effective NA Operating Rates
91%
82%
74%
71%
91%
90%
269
60%
219
186
163
161
$150
171
218
$200
100%
80%
66%
$250
89%
300
$300
84%
345
85%
330
$350
94%
350
97%
371
103%
$400
321
OSB Pricing US$/msf
Exhibit 9: RJL North American OSB Supply-Demand Model
40%
$100
20%
$50
0%
$0
2004
2005
2006
2007
2008
2009
2010
2011
N/C OSB Pricing (US$/msf)
2004
2012
2013E
2014E
2015E
2016E
Operating Rate (%) Right Axis
2005
2006
2007
2008
2009
2010
2011
2012
2013E
2014E
2015E
2016E
1.95
25.4
2.07
27.5
1.80
26.3
1.36
23.7
0.91
18.1
0.55
14.1
0.59
14.9
0.61
15.7
0.78
15.7
25.4
27.5
26.3
23.7
0.71
18.8
0.39
14.5
0.65
15.6
0.81
16.5
0.69
16.4
2.2
(1.2)
(2.7)
(4.8)
(4.3)
1.0
0.9
(0.1)
0.92
18.2
0.80
19.0
2.6
1.15
20.0
0.85
20.8
1.9
1.38
21.5
0.95
22.5
1.7
1.54
22.6
1.05
23.7
1.2
26.9
20.7
1.3
26.9
23.2
2.5
26.9
24.6
1.4
28.0
26.6
2.0
N.A. OSB Supply/Demand (bln sq ft)
U.S. Total Housing Starts (mlns)
N.A. Demand
Net Exports
N.A. Shipments
Net Change
N.A. OSB Capacity
Total
Effective
Net Change
Operating Rates
Total
Effective
OSB Price ($US/msf)
26.1
26.8
28.1
27.6
27.1
26.3
26.5
26.0
26.9
26.1
26.8
28.1
28.0
26.6
22.1
21.0
20.1
19.4
0.8
1.2
(0.1)
(1.3)
(4.5)
(1.1)
(0.9)
(0.7)
97%
103%
94%
86%
70%
55%
59%
63%
61%
97%
103%
94%
85%
71%
66%
74%
82%
84%
71%
91%
77%
90%
84%
91%
85%
89%
371
321
218
161
171
163
219
186
269
350
330
345
300
-
Source: Raymond James Ltd., APA, FEA
Potential OSB Capacity Restarts and Impact on the Market – Driven by depressed
commodity pricing and substantial cash losses over the most recent industry downturn,
a large number of OSB facilities were either shut and dismantled or indefinitely idled. In
fact, as it currently stands there are 38 mills currently operational and 16 mills
indefinitely idled (1 currently in ramp-up mode), while a further 15 have been
dismantled. According to FEA, these idled mills represent roughly 6.7 bln msf of
capacity or close to 25% of the 26.9 bln msf total existing North American capacity (as at
the end of 2012). Of course, while several large panel producers have announced plans
for mill restarts, the timing of the ramp-up for these facilities and the ability to staff the
mills with qualified workers will add an element of uncertainty. Referring to Exhibit 10
below we note, of the 16 curtailed mills, 8 have either announced an intention to restart
during either 2013 or 2014 or have started making preparations for restart that cause us
to view it as highly likely. Of these restarts 5 are in the US south and 3 are located in
western Canada.
Undeniable Supply Response – Reflecting high EBITDA margins and cash flow, we peg
effective OSB capacity as set to increase by over 5.1 bln msf, or 20% of total capacity, by
2015E. To date, 2013/2014 announced restarts total over 4.7 bln msf and while we
assume this new capacity takes time to ramp and eventually only operates at ~90%,
assumed 1.5% “capacity creep” adds to the total. We assume a conservative ramp
schedule with less than 50% (1.3 bln) of the over 3.0 bln msf in announced 2013 restarts
hitting the market this year. This is followed by 2.5 bln in 2014 and 1.4 bln in 2015,
taking effective capacity to 24.6 bln msf (see Exhibit 10). The potential restart of the
remaining ~3.4 bln msf of idled capacity is much less certain as many of these mills are
permanent closure candidates due to high cash costs, as well as wood supply and labour
issues, in our view.
Exhibit 10: Estimated OSB Capacity Changes
Announced Capacity Increases (all figures in bln msf)
Company
Location
Date Idled Capacity Timing
Georgia Pacific
Clarendon County, SC
n/a
0.800 1Q13
Louisiana Pacific
Peace Valley, BC*
n/a
0.200 1Q13
Louisiana Pacific
Thomasville, AL
2Q08
0.750 2Q13
Norbord
Jefferson, TX
1Q09
0.415 3Q13
Ainsworth
High Level, AB
4Q07
0.860 4Q13
1.5% Capacity Creep
Industry wide
n/a
Total 2013 Capacity Increase
3.025
Tolko Industries
Slave Lake II, AB
2Q07
0.800 1Q14
Louisiana Pacific
Dawson Creek, BC
4Q11
0.380 2H14
Norbord
Huguley, AL
1Q09
0.500 2H14
1.5% Capacity Creep
Industry wide
n/a
Total 2014E/15E Capacity Increase
1.680
Total 2013E/15E Capacity Increase
4.705
Remaining Idled Capacity
Company
Georgia Pacific
Georgia Pacific
Georgia Pacific
Huber
Louisiana Pacific
Norbord
Tolko
Weyerhaeuser
Total
Potential expansions
Ainsworth
Location
Grenada, MS
Mount Hope, WV
Skippers, VA
Spring City, TN
Chambord, QC
Val D'Or, QC
High Prairie, AB
Wawa, ON
2013E
0.400
0.110
0.215
0.100
0.175
0.292
1.292
-
2014E
0.320
0.070
0.460
0.265
0.620
0.240
0.075
0.125
0.311
2.486
2015E
0.460
0.260
0.315
0.348
1.383
5.161
Date Idled Capacity
4Q09
0.375
1Q09
0.375
2Q11
0.365
4Q11
0.350
4Q08
0.470
2Q12
0.340
1Q08
0.640
4Q07
0.470
3.385
Grand Prairie Expansion
600
* additional shift to operational mill
Share Ownership Overview
As of May 2013 Ainsworth had 240.8 mln shares outstanding, of which Brookfield Asset
Management owned 133.1 mln, or 55% (see Exhibit 11). In addition to the common
shares outstanding, Ainsworth also has 2.1 mln options outstanding with exercise prices
in the range of $1.03 to $3.73 (most in the money or very close) bringing the company’s
fully diluted share count to 242.9 mln. In addition, the company maintains 8.7 mln
warrants which, as of July 29, 2013 will either be converted to 1.52 common shares or
0.0035 common shares, depending on whether a trigger price of $7.89/share is met. If
the trigger price is met (which we consider unlikely) the warrants would convert at a
rate of 1.52 (into 13.2 mln shares). If not, the warrants would convert at 0.0035 (into
~30,400 shares). We do not assume any further dilution at this time related to these
warrants as the most likely outcome (the trigger price not being met) will have a
minimal impact on the fully diluted share count. According to data from ThomsonOne,
after Brookfield, the largest institutional holders of Ainsworth shares outstanding are
Blackrock at 2.3%, Pyramis at 1.9%, GWL Investment Management at 0.8%, and
O’Shaughnessy Asset Management at 0.7%. The largest individual holder is Paul
Houston, lead independent Board member, with ~464,000 shares, followed by Robert
Chadwick, also a Board member. We also note that CEO Jim Lake owns ~95,500 shares,
or roughly $350,000 worth of stock. The 3 month average daily volume of Ainsworth
shares traded is ~910,000 and the company has a float of 44%.
Ainsworth’s current capital structure was altered materially by a refinancing in 4Q12
where the company raised $175 mln via a fully backstopped rights offering with a total
of 140 mln shares being issued. In conjunction with the rights offering the company
issued US$350 mln in senior secured notes and the combined funds were used to repay
the company’s 11% senior secured notes (par value: US$398.3 mln) and the senior
secured term loan (par value: US$102.6 mln). This pushed maturities in 2014 and 2015
out to December 2017, reduced total debt by 30%, and reduced annual borrowing costs
by $25 mln.
We note Brookfield Asset Management came to own its stake in Ainsworth in March
2010 when a subsidiary, Brookfield Special Situations Partners Ltd., acquired common
shares and warrants in the company from HBK Investments who acquired them during
the recapitalization. Brookfield obtained common shares and warrants at a price of
$2.25/share for a total cost of $56 mln and, upon conversion of the warrants, arrived at
a 55% ownership stake.
Exhibit 11: Ainsworth Shareholder Summary (as-at May-30-13)
Shareholder Summary
Largest Institutional Holders
# Shares (mlns)
Blackrock
5.539
Pyramis
4.564
GWL Investment Management
1.958
O'Shaughnessy Asset Management
1.788
Other
4.031
Total Institutional
17.88
Insiders
Largest Insider Holders
# Shares (mlns)
Brookfield Asset Mgmt
133.146
Paul Houston
0.464
Robert Chadwick
0.241
Jonathan Mishkin
0.190
Other Insiders
0.006
Total Insider
134.046
% Outstanding
2.3%
1.9%
0.8%
0.7%
1.7%
7.4%
Brookfield
Asset
Mgmt, 55%
% Outstanding
55.3%
0.2%
0.1%
0.1%
0.0%
55.7%
Source: ThomsonOne, Raymond James Ltd.
Financial Analysis & Outlook
Driven by rising shipments from the restarted High Level mill and higher average
forecasted OSB prices, we expect Ainsworth will post substantial growth in each of
revenues and EBITDA in 2013 relative to 2012. In fact, assuming an average OSB price of
US$350/msf (well below current YTD prices of US$403/msf but up considerably from
US$270/msf in 2012), a C$ of US$0.98 (in-line with RJL’s marked-to-market assumption)
and shipments of 1.67 bln msf we arrive at revenues of $566 mln (up 38% y/y) and
EBITDA of $236 mln (up over 120% from 2012). We note that our 2013 shipment
estimate assumes the High Level mill restarts and operates at an average of 50% in
4Q13. Looking to 2014, we assume OSB capacity restarts begin to pressure prices,
particularly in the second half of the year, prompting us to adopt a more conservative
forecast of US$330/msf. Offsetting this, however, would be a full year of shipments
from the 860 mln msf/yr High Level mill which, based on management guidance of a 12
Other
Institutional
, 7%
Insiders, 0%
Public &
Other, 37%
month ramp-up period, we assume would run at an average operating rate of 75% in
2014, while the company’s other three mills run at close to full capacity for a
consolidated operating rate of 87% on capacity of 2.54 bln msf and shipments of 2.18
bln msf. Therefore, the net effect of these higher shipments and lower commodity
prices is positive with sales rising to $716 mln and EBITDA improving to $270 mln. For
the time being we do not factor the eventual restart of the second line at Grande Prairie
into our EBITDA estimates. On the cost side, we expect fibre costs for Ainsworth will be
relatively flat over our forecast period while resin prices increase modestly at 3%-4% per
year.
Sensitivity to OSB pricing and FX – Referring to the sensitivity tables in Exhibits 12 and
13 below, we highlight the company’s significant sensitivity to OSB pricing and USD/CAD
bilateral FX rates. We note a US$10/msf change in OSB prices impacts our 2014 EBITDA
estimate by approximately $20-$23 mln while a US$0.01 change in the USD/CAD FX rate
impacts EBITDA by an estimated $7-$8 mln. Therefore, as a bear case we can envision a
scenario where the company makes as little as ~$150 mln in 2014 EBITDA (assuming
US$280/msf OSB and parity FX). Of course, conversely, we also believe it is plausible
that under a bull case scenario the company generates as much as ~$385 mln in EBITDA
(assuming US$375/msf OSB prices and a USD/CAD of $0.96) should US housing starts
materially exceed our expectations. Assuming a 5.6x 2014 EV/EBITDA multiple, this bear
case scenario would result in a target share price of ~$2.50/share (53% below our $5.30
target), whereas the bull case would result in a theoretical target price closer to
$8.00/share (51% above our target). We believe these 2 scenarios illustrate both the
risks involved in an investment in Ainsworth and also the significant potential upside.
Our target price of $5.30 assumes a US$330/msf 2014 average OSB price forecast and a
USD/CAD of $0.98.
Exhibit 12: Ainsworth 2014E EBITDA Sensitivity to OSB Prices and USD/CAD FX Rates
Ainsworth 2014E EBITDA Sensitivity to OSB Pricing and US$/C$ FX Rates
US$/C$
270
0.90
0.91
0.92
0.93
0.94
0.95
0.96
0.97
0.98
0.99
1.00
1.01
1.02
1.03
1.04
1.05
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
200
21
16
11
6
1
(4)
(9)
(14)
(18)
(23)
(27)
(31)
(36)
(40)
(44)
(48)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
225
82
76
70
64
58
53
48
42
37
32
27
22
18
13
8
4
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
250
142
135
129
122
116
110
104
98
93
87
82
76
71
66
61
56
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
280
214
207
200
193
186
179
172
166
159
153
147
141
135
129
123
118
7/16' OSB Prices (US$/msf, del. West)
300
330
340
350
$ 263 $ 335 $ 359 $ 384
$ 255 $ 327 $ 350 $ 374
$ 247 $ 318 $ 342 $ 365
$ 239 $ 310 $ 333 $ 356
$ 232 $ 301 $ 325 $ 348
$ 225 $ 293 $ 316 $ 339
$ 218 $ 285 $ 308 $ 331
$ 210 $ 278 $ 300 $ 323
$ 204 $ 270 $ 292 $ 315
$ 197 $ 263 $ 285 $ 307
$ 190 $ 256 $ 277 $ 299
$ 184 $ 248 $ 270 $ 292
$ 178 $ 241 $ 263 $ 284
$ 171 $ 235 $ 256 $ 277
$ 165 $ 228 $ 249 $ 270
$ 159 $ 221 $ 242 $ 263
RJL Current Estimates
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
375
444
434
424
415
405
396
387
379
370
362
353
345
337
330
322
315
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
400
504
494
483
473
463
454
444
435
426
417
408
399
391
382
374
366
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
450
625
613
602
590
579
568
557
547
537
526
517
507
497
488
479
470
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
500
746
733
720
707
695
683
671
659
648
636
625
615
604
594
583
574
Source: Raymond James Ltd.
Exhibit 13: Ainsworth 2013E EBITDA Sensitivity to OSB Prices and USD/CAD FX Rates
Ainsworth 2013E EBITDA Sensitivity to OSB Pricing and US$/C$ FX Rates
US$/C$
236
0.90
0.91
0.92
0.93
0.94
0.95
0.96
0.97
0.98
0.99
1.00
1.01
1.02
1.03
1.04
1.05
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
280
159
153
147
142
136
131
126
121
116
111
106
102
97
93
88
84
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
300
196
190
184
178
172
166
161
155
150
145
140
135
130
125
121
116
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
315
224
217
211
205
199
193
187
181
176
170
165
160
155
150
145
140
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
330
252
245
238
232
225
219
213
207
201
196
190
185
179
174
169
164
7/16' OSB Prices (US$/msf, del. West)
340
350
360
370
$ 270 $ 289 $ 307 $ 326
$ 263 $ 282 $ 300 $ 318
$ 256 $ 275 $ 293 $ 311
$ 250 $ 268 $ 286 $ 304
$ 243 $ 261 $ 279 $ 297
$ 237 $ 254 $ 272 $ 290
$ 231 $ 248 $ 265 $ 283
$ 225 $ 242 $ 259 $ 276
$ 219 $ 236 $ 253 $ 270
$ 213 $ 230 $ 246 $ 263
$ 207 $ 224 $ 240 $ 257
$ 201 $ 218 $ 234 $ 251
$ 196 $ 212 $ 229 $ 245
$ 190 $ 207 $ 223 $ 239
$ 185 $ 201 $ 217 $ 233
$ 180 $ 196 $ 212 $ 228
RJL Current Estimates
380
345
337
329
322
314
307
300
294
287
280
274
268
261
255
249
244
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
390
363
355
347
340
332
325
318
311
304
297
291
284
278
272
265
260
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
400
382
374
366
358
350
343
335
328
321
314
307
301
294
288
282
275
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
450
475
466
457
448
439
431
422
414
406
399
391
384
376
369
362
355
Exhibit 14: Ainsworth Shipment, Revenue, EBITDA and FCF Forecasts
2,500
2,175
$800
$300
$700
$250
2,000
1,547
1,546
1,620
$500
1,500
$400
C$ mlns
1,547
C$ mlns
mln msf
1,633
236
Free Cash Flow (EBITDA-Interest-Capex-Taxes)
$200
$600
1,674
270
EBITDA
173
135
$150
107
$100
54
50
$50
1,000
$300
$200
500
$100
13
5
$0
-$50
-6
-8
-55
-65
-$100
-101
0
$0
2008
2009
2010
Shipments (mln msf)
2011
2012
2013E
2014E
-$150
2008
2009
Sales (C$ mlns, RT Axis)
Debt Analysis
While Ainsworth was highly levered at one time, the company’s 2008 restructuring and
2012 refinancing have each combined to materially reduce the debt levels and leave the
company with a solid balance sheet (see Exhibit 15). With net debt currently at roughly
20% of total cap and an EBITDA to interest ratio of 8.5x in 2013E and 10.8x in 2014E, we
regard the company’s debt levels as manageable. After factoring in robust free cash
flows over the next two years of approximately $310 mln, we see the company’s net
debt levels falling further, even if more of this cash is spent on capital projects than we
currently expect. Referring to the left hand side of Exhibit 15 we note the vast majority
of Ainsworth’s debt (US$350 mln in senior secured notes) is due in 2017, while the
company’s two equipment financing facilities are due in 2014. We do not foresee any
issue with Ainsworth either repaying or refinancing these two facilities when they come
due. The $350 mln senior secured notes include a 10% annual repayment option ($35
mln/year). We note, our estimates assume $20 mln in capex goes towards the High
Level mill restart this year (consistent with management guidance) but do not assume
any cash is used towards the completion of the second line at Grande Prairie. While we
2010
2011
2012
2013E
2014E
believe Ainsworth’s net debt will fall materially by the end of 2014, we see decisions on
returning cash to shareholders (either via dividends or share buybacks) are likely 18 to
24 months out as the company has an attractive pipeline of expansion projects and will
likely wait for some clarity on the pace of the US housing recovery before committing to
distributing cash.
Exhibit 15: Ainsworth Debt Summary
$1,200
$500
$400
Ainsworth Debt Summary
Ainsworth Net Debt
$1,000
US$350.0
$800
2008 res tructuring
$300
C$ mlns
$US mlns
$350
$250
$200
$150
Matures: Sep-14
Rate: LIBOR + 3.5%
Matures: Jun-14
Rate: EURIBOR + 1.65%
$100
$50
$600
2012 refi nancing &
ri ghts offering
$400
$200
US$10.1
€ 3.6
$0
$0
Senior Secured notes Equipment Loan (a) Equipment Loan (b)*
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
$450
Matures: Dec-17
Rate: 7.5%
The Senio r Secured No tes and Equipment Lo an (a) are deno minated in USD Equipment Lo an (b) is
deno minated in Euro s
Source: Ainsworth Lumber Co. Ltd., Capital IQ, Raymond James Ltd.
Valuation & Recommendation
Initiating coverage with an Strong Buy rating and $5.30/share target price – Based on
our $270 mln 2014 EV/EBITDA estimate and a 5.6x 2014 EV/EBITDA multiple (in-line
with comp Norbord) we arrive at a target price for Ainsworth of $5.30/share, which
represents ~46% upside from current levels – consistent with a Strong Buy rating, in our
view. We note OSB comps Norbord and Louisiana Pacific are currently trading at 6.1x
and 6.4x, respectively (note: the Norbord multiple is based on RJL estimates while
Louisiana Pacific’s multiple is based on consensus estimates – see Exhibit 17).
Therefore, as Ainsworth, trading at just 4.1x 2014E EV/EBITDA, is currently valued at a
material discount to these comps we see a catch-up as the market comes to recognize
the company’s increasing capacity, strong relative margins, and quality asset base. We
also highlight Ainsworth’s significant leverage to OSB prices and note a US$10/msf
change in OSB pricing impacts our 2014 EBITDA estimate by $20-$23 mln and, holding
the assumed multiple constant, the corresponding impact to our target share price is
approximately $0.50/share, or 9%. Viewed another way, if we were to assign Ainsworth
an EV/EBITDA multiple in-line with the comps, we arrive at a theoretical target price
closer to $6.00/share (see Exhibit 16).
Exhibit 16: Target Price Sensitivity to EBITDA and Assumed EV/EBITDA Multiple
Ainsworth Target Price Sensivity to EBITDA and EV/EBITDA Multiple
5
4.5
4.6
4.7
4.8
4.9
5.0
5.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
6.2
6.4
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
150
1.84
1.91
1.97
2.03
2.09
2.16
2.21
2.28
2.34
2.40
2.46
2.52
2.59
2.65
2.89
3.02
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
175
2.31
2.38
2.45
2.52
2.60
2.67
2.74
2.81
2.88
2.96
3.03
3.10
3.17
3.24
3.53
3.68
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
200
2.77
2.85
2.94
3.02
3.10
3.19
3.26
3.35
3.43
3.51
3.59
3.68
3.76
3.84
4.17
4.33
225
3.23
3.33
3.42
3.51
3.60
3.71
3.79
3.88
3.97
4.07
4.16
4.25
4.35
4.44
4.81
4.99
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2014E EBITDA (C$ mlns)
250
270
280
3.70 $ 4.07 $ 4.25 $
3.80 $ 4.19 $ 4.37 $
3.90 $ 4.30 $ 4.48 $
4.01 $ 4.41 $ 4.60 $
4.11 $ 4.52 $ 4.71 $
4.22 $ 4.64 $ 4.84 $
4.31 $ 4.74 $ 4.94 $
4.42 $ 4.85 $ 5.06 $
4.52 $ 4.97 $ 5.17 $
4.62 $ 5.08 $ 5.29 $
4.73 $ 5.19 $ 5.41 $
4.83 $ 5.30 $ 5.52 $
4.93 $ 5.41 $ 5.64 $
5.03 $ 5.52 $ 5.75 $
5.45 $ 5.97 $ 6.21 $
5.65 $ 6.19 $ 6.44 $
RJL Current Target
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
300
4.62
4.75
4.87
4.99
5.12
5.25
5.36
5.49
5.61
5.73
5.86
5.98
6.10
6.23
6.72
6.97
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
325
5.09
5.22
5.35
5.49
5.62
5.77
5.89
6.02
6.16
6.29
6.42
6.56
6.69
6.83
7.36
7.63
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
350
5.55
5.69
5.84
5.98
6.13
6.28
6.41
6.56
6.70
6.85
6.99
7.13
7.28
7.42
8.00
8.29
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
385
6.20
6.36
6.51
6.67
6.83
7.01
7.15
7.31
7.47
7.62
7.78
7.94
8.10
8.26
8.89
9.21
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
400
6.48
6.64
6.80
6.97
7.13
7.32
7.46
7.63
7.79
7.96
8.12
8.29
8.45
8.62
9.27
9.60
Exhibit 17: Building Materials and OSB Comps
Recent
Price
Target
Upside
May-30-13
Price4
(%)
Ticker
Company
Symbol
Rating
Market
Cap
Net
Debt
Total
EV
($ mlns)
Net
Debt
EBITDA
2012A 2013E 2014E
(%)
$ mlns
EV/EBITDA Multiples
Annual
2012A 2013E
EPS
2013E 2014E
P/E Ratio
2013E 2014E
2014E
BUILDING MATERIALS
Lumber
Canfor
1
Interfor
West Fraser Timber
2
Conifex
2
Western Forest Prod.
TSX:CFP
OP2
$
17.55
$
24.50
40%
2,505
274
2,779
10%
213
519
673
13.1x
5.4x
4.1x
1.75
2.54
10.0x
6.9x
TSX:IFP.A
OP2
$
9.47
$
12.50
32%
529
203
732
28%
59
143
180
12.4x
5.1x
4.1x
1.11
1.52
8.5x
6.2x
338
TSX:WFT
OP2
$
78.43
$ 105.00
34%
3,476
252
3,728
12%
694
870
11.0x
5.4x
4.3x
8.77
11.45
8.9x
6.8x
TSXV:CFF
SB1
$
7.62
$
11.25
48%
183
65
248
26%
(3)
35
70
n.m.
7.0x
3.5x
0.83
2.15
9.2x
3.5x
TSX:WEF
MP3
$
1.30
$
1.40
8%
616
(100)
516
12%
52
105
125
n.m.
4.9x
4.1x
0.19
0.19
6.8x
6.9x
5.6x
OSB
Ainsworth
4
Norbord
3
Louisiana Pacific
TSX:ANS
SB1
$
3.63
$
5.30
46%
882
227
1,109
20%
107
236
270
10.4x
4.7x
4.1x
0.54
0.64
6.7x
TSX:NBD
MP3
$
33.20
$
29.00
-13%
1,819
291
2,110
37%
188
355
337
11.0x
5.8x
6.1x
3.85
3.55
8.6x
9.3x
NYSE:LPX
n.m.
$
18.00
$
21.27
18%
2,554
320
2,874
11%
185
429
452
15.6x
6.7x
6.4x
1.49
1.56
12.1x
11.6x
Notes:
1
Canfor EBITDA estimates and net debt exlcude 50% of Canfor Pulp's EBITDA and net debt for comparability purposes reflecting the company's ownership stake
2
Net debt for Conifex is pro-forma for bio-energy project financing, Western Forest Products' net debt is pro-forma for non-core asset sales
3
Louisiana Pacific is not covered by Raymond James Ltd., price target and estimates are consensus figures
4
Norbord financial estimates and net debt are reported in USD, share price shown in CAD
Source: Raymond James Ltd., Capital IQ, Company Reports
Appendix I: Management & Board of Directors
Jim Lake, CEO: After joining Ainsworth as VP of Operations in June 2010, Jim Lake was
promoted to President and COO in September 2011 before being appointed President
and CEO and joining the Board of Directors in March 2013. Prior to joining Ainsworth,
Mr. Lake spent time at Grant Forest Products as VP of Operations for three years, and
prior to that held the position of VP of Manufacturing at Louisiana Pacific Corp. where
he worked for 23 years. Mr. Lake holds a Bachelor of Science in Management and
Leadership from Kennedy Western University and served as a non-commissioned officer
(NCO) in the United States Marine Corps.
Rick Eng, CFO: Rick Eng has held the position of VP, Finance and CFO since September
2012. Prior to this, Mr. Eng was a SVP at Brookfield Asset Management where he spent
six years focusing on private equity investing and capital markets activities in western
Canada. Before Brookfield, Mr. Eng was a VP in investment banking at National Bank
Financial and an Associate in private equity at TD Capital. Mr. Eng earned his CA
designation at KPMG after obtaining a B.A. (Economics) from Queen’s University.
Barton Bender, VP Sales and Marketing: Mr. Bender has been the VP, Sales and
Marketing of Ainsworth since March 2012 and was previously General Manager, Sales
and Logistics of the company.
Chad Eisner, General Manager, Operations: Mr. Eisner has been the General Manager,
Operations of Ainsworth since November 2011. Previously, he was the site manager at
the company’s Barwick mill and prior to that, site manager at Grant Forest Products.
Robert Fouquet, VP Business Development: Mr. Fouquet has been the VP, Business
Development of Ainsworth since March 2012; previously, he was VP, Sales and
Marketing of the company.
Exhibit 18: Ainsworth Board of Directors
Name
Role/Principal Occupation(s)
Peter Gordon; Chairman; Director since May 2010. Mr. Gordon is a Managing Partner at Brookfield Asset Management Inc., where he is a senior manager in
Corporate Governance
Brookfield Capital Partners Ltd. He has over 25 years of industrial experience, principally in the mining and forest products industries,
Committee
having held a number of senior management positions including President and CEO of Fraser Papers Inc. from 2007 to 2010. He also
currently serves as a Director of Western Forest Products Inc. and of MAAX Bath Inc.
Directors
Paul Houston; Lead
Independent Director,
Audit Committee
Director since July 2008. A retired executive, Mr. Houston was President and CEO of The Alderwoods Group Inc., a provider of funeral and
cemetery services, from 2001 to 2007. He also served as Director of Vicwest Income Fund, a steel fabricator, in 2006 and of CFM
Corporation, a home products company, in 2004 and 2005.
Robert Chadwick;
Compensation
Committee
Director since July 2008. Mr. Chadwick is a partner and a member of the Executive Committee at Goodmans LLP. He practices corporate
and commercial law.
Paul Gagné; Audit
Committee
Director since May 2011. Mr. Gagné, a retired executive, has extensive experience in the natural resource sector and is a Chartered
Accountant. He currently serves as Chairman of the Board of Wajax Corporation, and is a Director of CAE Inc. and Textron Inc. He was
formerly a Director of Inmet Mining and also served as a Director of Fraser Papers Inc. from 2004 to February 2011.
John Lacey; Corporate
Governance Committee
Director since July 2008. Mr. Lacey, a retired executive, currently serves as the Chairman of the Advisory Board for Brookfield Capital
Partners Ltd. He also currently serves as a Director of Telus Corporation and of Loblaw Companies Limited. In the previous five years, Mr.
Lacey has also served as Director of CIBC and Stelco Inc.
Gordon Lancaster; Audit Director since May 1993. Mr. Lancaster, a Chartered Accountant, retired from the position of Chief Financial Officer of Ivanhoe Energy Inc.
Committee
in 2009. He also currently serves as a Director of SouthGobi Resources Limited and of Sonde Resources Corp, an oil and gas exploration
company.
Pierre McNeil;
Compensation
Committee
Director since July 2010. Since 2006, Mr. McNeil has been Senior Vice President of Brookfield Asset Management Inc., with responsibilities
in Brookfield Capital Partners Ltd. He has a diverse operational and human resources management background in the forest products and
manufacturing industries. Mr. McNeil was formerly the CEO of Concert Industries, Inc. and currently serves as a Director of Western Forest
Products Inc. and MAAX Bath Inc.
Jim Lake; CEO
Director since March 2013. After joining Ainsworth as VP of Operations in June 2010, Jim Lake was promoted to President & COO in
September 2011 before being appointed President and CEO and joining the Board of Directors in March 2013. Prior to joining Ainsworth,
Mr. Lake spent time at Grant Forest Products as VP of Operations for three years, and prior to that held the position of VP of Manufacturing
at Louisiana Pacific Corp. where he worked for 23 years.
Appendix II: Risks
Currency Risk – As OSB prices are denominated in US dollars whereas Ainsworth’s costs
are primarily incurred in Canadian dollars, the company is exposed to the risk of the C$
appreciating relative to the US$, resulting in reduced margins in Canadian dollar terms
(Ainsworth’s reporting currency).
Commodity Price Risk – The global forest products industry is highly cyclical and prices
for Ainsworth’s key product, OSB panels, may vary materially from our estimates and
negatively impact the company’s results.
Environmental Issues/Government Regulation – Ainsworth is subject to regulation in
terms of both government regulations relating to forest management practices, as well
as health and safety requirements. Should any of these regulations change it could
result in increased costs to Ainsworth to maintain compliance or restrict access to wood
fibre. In addition, the company is also subject to general and industry specific
environmental laws which could adversely affect the business.
Fibre Costs Availability and Other Input Costs – Wood fibre is one of Ainsworth’s key
inputs and the cost of it is materially impacted by costs including logging/hauling,
stumpage rates, fuel, road building, and reforestation obligations. Each of these costs
could vary materially from our estimates and negatively impact Ainsworth’s results. In
Canada, wood fibre is sourced primarily by agreements with provincial governments
which are granted for various terms from five to twenty-five years and are generally
subject to regular renewals every five years. Difficulties renewing these agreements
could negatively impact the company’s business.
Another key input in OSB is resin, which can also fluctuate materially and could also
negatively impact Ainsworth’s results. Resin costs are influenced by changes in the
prices of petroleum products, as well as demand for and availability of resin products.
Rising petroleum prices could also reduce the company’s profitability.
Maintenance Costs/Facility Disruptions – From time to time Ainsworth must carry out
maintenance at its facilities which could potentially last longer or cost more than we
currently estimate. In addition, the company’s equipment could malfunction and/or
require unexpected repairs which could negatively impact the company’s operations
and result in higher than expected maintenance costs.
Inclement Weather/Forest Fires – There exists the potential for inclement weather in
the areas where Ainsworth operates to hinder the company’s ability to harvest and/or
transport logs during key harvesting seasons, potentially resulting in reduced operating
rates. In addition, forest fires are common during the summer in certain areas of Canada
and could impact the company’s timber assets and/or logging operations.
High Level Mill and other Expansion Initiatives Implementation Risk – As Ainsworth
proceeds with the ramp up of the High Level mill there are issues such as cost overruns,
delays, and other unexpected implementation issues which could negatively impact the
project’s expected returns. The company will face similar risks when and if the second
line Grande Prairie is completed and restarted.
Labour Agreements – Ainsworth’s Barwick and 100 Mile House mills are unionized.
During 2010, new union contracts were negotiated for 100 Mile House, due to expire on
June 30, 2013, and Barwick, due to expire on July 31, 2013. The company could
experience strikes or work interruptions if it is unable to negotiate acceptable contracts
with its various trade unions upon expiry.
Appendix III: OSB Industry Background
What is OSB?
OSB is a wood-based panel manufactured from waterproof heat-cured adhesives and
rectangular-shaped wood strands that are arranged in cross-oriented layers forming
wide mats that are placed in a thermal press and eventually cut into individual panels.
The resulting product is a structurally engineered wood panel with strength and
performance characteristics similar to plywood but produced at a lower cost. OSB is
used primarily in new home construction, repair/remodeling, furniture production and
industrial/light commercial applications. Specific uses for OSB panels within a wood
frame home include wall sheathing, roofing, flooring, and door and window headers,
among others (see Exhibit 19). By end market, new home construction, which includes
single family, multi-family and mobile homes, represents ~46% of total OSB demand,
followed by repair and remodeling at 25%, industrial uses at 16%, and other nonresidential construction applications at 13% (see Exhibit 20, left side). North American
produced OSB is primarily consumed in the US and Canadian residential construction
markets with a relatively small proportion (~4%) being shipped overseas. The bulk of
exported OSB is sent to Japan and Korea. Historically, industry-wide oversupply has
been an issue for the industry, resulting in significant commodity price volatility and
periods where producers have incurred substantial losses. On the positive side, as OSB
is a lower cost product than plywood it has taken market share from plywood over time
and continues to do so (details follow). In addition, the industry is relatively
consolidated with the top 5 producers controlling 77% of North American capacity (see
Exhibit 20, right side); however, unfortunately this has not traditionally resulted in
rational production decisions.
As it currently stands, the OSB industry is fresh off an extremely painful five year
downturn where large amounts of capacity were idled or dismantled. Thus, as the US
housing market recovery gains momentum and as OSB prices (already up 92% YTD vs.
2012 as of May 24) remain strong we now believe the key question is to what extent will
idled capacity be restarted and whether or not producers take this opportunity to
exercise production discipline. We note that mill restarts totaling ~20% of total capacity
have already been announced. While we expect this will serve to cause moderation in
panel prices over our forecast horizon, there is some uncertainty, in our view, as to
when this capacity will eventually come online.
Exhibit 19: OSB Residential Construction End Uses
Exhibit 20: OSB Demand by End Use (LHS) and Top North American OSB Producers (RHS)
Other, 11%
Repair &
Remodeling, 25%
Si ngle Family, 34%
Loui siana
Pa ci fic, 20%
Tol ko, 5%
Huber, 7%
Georgia Pa cific,
17%
Ai ns worth, 10%
Industrial, 16%
Mul ti Family, 5%
Non-Residential
Cons truction, 13%
Weyerhaeuser,
14%
Mobi le Homes, 7%
Norbord, 16%
Source: APA, Norbord Inc.
Exhibit 21: OSB Demand by End Use
30
bln msf (3/8" basis)
25
20
1.8
1.9
4.1
2.0
2.1
4.5
4.7
15
10
2.3
2.4
19.8
2.4
2.3
4.1
17.8
14.3
5
9.3
2.2
2.2
1.9
2.4
1.9
2.4
1.9
2.6
3.6
3.6
3.7
3.8
6.2
7.0
6.8
7.3
2009
2010
2011
2012
0
2005
2006
Residential
2007
2008
Remodeling
Industrial
Non-Residential
Source: APA
While we outlined our view of North American OSB supply-demand above, we note FEA
forecasts total OSB demand growing to 18.0 bln msf and 20.8 bln msf in 2013 and 2014,
respectively (from 17.0 bln msf in 2012), representing y/y growth rates of 5.9% and
15.8%, respectively. These estimated demand figures compare to RJL estimates of 19.0
bln msf and 20.8 bln msf in 2013 and 2014, respectively. On the supply side, North
American OSB capacity stood at 26.9 bln msf as of 2012, with FEA estimating this
growing by 0.7% to 27.1 bln msf in 2013 and by 3.8% to 28.1 bln msf in 2014. We note,
however, that these capacity figures do not factor in idled capacity, or, the difference
between the total rated capacity of mills in existence as compared to those currently
operational. As discussed above, our supply-demand analysis indicates effective capacity
(excluding idled mills) of 20.7 bln msf, 23.2 bln msf, and 24.6 bln msf in 2013-2015 for
effective operating rates of 91%, 90%, and 91% over this period. As a result of the
recent industry downturn the difference between overall and effective capacity is
currently higher than normal and we note it compares to 2007 when total capacity of
28.6 bln msf and effective capacity of 27.9 bln msf differed by just 0.7 bln msf. We note,
given the current gap between total and effective capacity, we base our commodity
price forecasts on effective, rather than overall operating rates.
Exhibit 22: Quarterly OSB Production, Capacity, and FEA Estimated Effective Capacity
FEA Forecast
7.5
7.0
6.5
Bln msf 3/8" Basis
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
2.0
Production
Capacity
Effective Capacity
Source: FEA
End Market Analysis
New Home Construction/ US Housing Market
OSB consumption from residential construction still well below previous highs – At its
peak in 2005, residential home consumption of OSB totaled 19.8 bln msf and
represented 72% of the commodity’s end use. Of course, at this time US housing starts
were averaging close to 2.0 mln/year. With the precipitous industry downturn that
began in 2007/2008, OSB consumption by the residential home construction sector had
fallen a staggering 69% to just 6.2 bln msf in 2009, representing just 44% of total
demand. Since then, as the market has slowly recovered consumption has improved,
coming in at 7.3 bln msf for 2012, up 19% from 2009 lows, and will most likely improve
further in 2013. Regardless, for reasons outlined below we expect it will not be until
2016 when OSB demand from this market segment approaches normalized levels.
Recent signs of improvement – With US housing starts breaching the 1.0 mln start mark
as of March 2013 (see Exhibit 24) we believe the market’s recovery, albeit gradual,
appears firmly entrenched. While April 2013 housing starts of ~853,000 were down
16.5% m/m we note forward looking building permits at 1.02 mln were up 14.7% m/m
and came in at the highest since June 2008. We point to reduced new and existing home
inventories, stabilized and rising prices, the entry of investors into the single home
market buying portfolios of rental properties, and gradual improvements in the
economy/employment outlook as reasons for the increase in residential construction
activity. Specifically, inventories of new and existing homes are now at ~153,000 and
1.93 mln units, respectively, compared to recessionary highs of ~497,000 and 3.82 mln,
respectively, with total inventories down 16% y/y (see Exhibit 23). Stable home prices, a
key element necessary for getting prospective buyers off the sidelines, are also now
apparent, with median home prices current at ~$247,000, up 18% from lows of
~$209,000 in January 2009 and up 3% from March 2012’s ~$240,000. Meanwhile, home
affordability also remains on par with all-time highs. In light of these improving
fundamentals and the fact that housing starts have exceeded our forecasts of late, we
made some modest adjustments to our US housing outlook in conjunction with our
Raymond James & Associates US Homebuilding team, however, we still stress
meaningful headwinds are expected to prevent a more expedient recovery – details
follow.
Exhibit 23: US Existing Home Inventories (LHS) and New Home Inventories (RHS)
4,500
4,000
14.0
700
14.0
12.0
600
12.0
10.0
500
10.0
400
8.0
300
6.0
4.0
200
4.0
2.0
100
2.0
0.0
0
0.0
3,500
2,500
8.0
2,000
6.0
000's units
000's units
3,000
1,500
Jan-13
Aug-12
Oct-11
Mar-12
May-11
Jul-10
Dec-10
Feb-10
Apr-09
Sep-09
Jun-08
Existing Home Inventories (LHS)
Nov-08
Jan-08
Aug-07
Oct-06
Mar-07
May-06
Jul-05
Dec-05
Feb-05
Apr-04
Sep-04
Jun-03
Nov-03
0
Jan-03
500
Jan-03
May-03
Sep-03
Jan-04
May-04
Sep-04
Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13
1,000
Months Supply (RHS)
New Home Inventories (LHS)
Months Supply New Homes (RHS)
Source: National Realtor’s Association, US Census Bureau
2,000
2,000
1,800
1,800
1,600
1,600
1,400
1,400
000's
000's
Exhibit 24: US Homebuilding Permits (LHS) and Housing Starts (RHS)
1,200
1,200
1,000
1,000
800
800
600
600
400
400
200
200
0
2003
2004
2005
2006
2007
Single Family Housing Permits
2008
2009
2010
2011
2012
Multi Family Housing Permits
2013
0
2003
2004
2005
2006
2007
Total Housing Starts
2008
2009
2010
2011
2012
2013
Single Family Housing Starts
Source: US Census Bureau
Increasing (But Still Below Consensus) US Housing Start Forecasts – In-line with the
recent update issued by the Raymond James & Associates US Homebuilding team (RJA)
we also recently increased our 2013 US housing start forecast to 920,000 from 895,000
previously. This increase is driven by an estimated 27% jump in multi-family activity –
important as we note that multi-family starts use just ~1/3 OSB per start relative to
single-family construction. RJA forecasts total housing starts increasing 25% to 1.15 mln
units in 2014E, 20% to 1.38 mln in 2015E, before reaching trend levels of 1.54 mln in
2016E (see Exhibit 25). Backstopping the expectation for a slow housing recovery, our
RJA team highlights unprecedented hurdles – 3.8 million homes in the foreclosure
pipeline, 11 - 14 mln households in negative equity, and 17.3 mln baby-boomers turning
65 in the next five years. New home production also faces headwinds from Dodd-Frank
mortgage regulations, skilled labor shortages, and dwindling supply of developed home
sites in “sellable” locations – we elaborate on these issues below.
Exhibit 25: RJL US Housing Regression Model
RJ US Total Housing Start Regression Model
2.5
Forecast
Actual
In Sample Forecast
Linear (In Sample Forecast)
R² = 0.95
2.0
mlns
1.5
1.0
0.5
0.0
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Independent Variables
Intercept
US GDP
CASE SHILLER INDEX
FANNIE MAE 30 Yr MORTGAGE RATE
FORECLOSURES STARTED
25-34 YRS
>65 YRS
UNEMPLOYMENT RATE
TOTAL HOUSING INVENTORY
US Total Housing Starts (mln)
Yr/Yr % Change
Coeff.
t-Stat
2010
2.409
9.18
0.026
5.19
2.7
0.004
6.20
158
(0.022) (1.19)
2.9
(0.853) (11.40)
1.4
0.097
3.07
1.3
(0.197) (3.84)
1.8
(0.048) (2.68)
9.8
(0.157) (3.58)
4.8
2011
2012
2.1
153
2.2
1.4
1.6
2.2
8.8
3.5
0.61
2.4
153
2.6
1.3
1.5
2.6
8.1
3.0
0.77
2.7
160
3.2
1.2
1.5
2.6
7.7
2.6
0.92
3.1
165
4.0
1.0
1.5
2.6
7.2
2.4
1.15
3.0
170
5.0
0.6
1.5
2.6
7.0
3.1
1.38
3.0
183
5.3
0.6
1.5
2.6
6.6
3.0
1.54
4%
26%
19%
25%
20%
11%
0.59
2013
2014
2015
2016
Source: Bloomberg, ReatlyTrac, Mortgage Bankers Association, US Census Bureau, Raymond James & Associates,
Raymond James Ltd.
5 factors behind a slow housing recovery – As part of RJA’s recent quarterly housing
update the 5 greatest factors precluding a more robust housing recovery are as follows:
1.
There are currently 2.7 million excess vacant housing units in the US still
waiting to be absorbed – this is down from recessionary highs of 3.7 mln units,
but remains well above the historical average of 0.8 mln units. With household
formation rates recently reaching ~900,000 households y/y (just slightly below
historical averages) the absorption rate of these units at 2012 levels of housing
production mean it could take three years to normalize excess these vacancies.
2.
The government must retreat from the mortgage market. Fannie, Freddie, and
FHA/VA dominate the mortgage market with 87% of all mortgages originated in
4Q12 carrying some form of government guarantee. RJA notes this is clearly
unsustainable, but in order to reintroduce private capital, mortgage rates must
go higher and underwriting standards could get even tighter under Dodd-Frank.
This could represent a meaningful roadblock, particularly to first time
homebuyers.
3.
Pervasive negative equity remains a major issue. As per the most recent data
from Zillow and TransUnion, roughly 14 million households with a mortgage are
underwater. This has the effect of “trapping” homeowners in their current
homes, preventing many families who might otherwise change homes from
doing so as they lack the equity to roll into the down payment for a new home.
4.
Negative demographic shift developing. Growth in 65+ households (net home
sellers) is dramatically outpacing growth in 25- to 34-year-olds (net home
buyers). Birth and fertility rates have been declining since 2007. “Millennial”
women are delaying motherhood longer than any previous generation. With
larger numbers of older households downsizing and a smaller number of the
younger cohorts taking longer to get into the market, the negative implication
for the housing market from a demographic standpoint is clear.
5.
Dramatically higher levels of student loan debt. Recent debt-laden college
graduates are leaving school with more than $24,900 of student loans on
average. Aggregate student loan debt will soon surpass $1 trillion. Of all
households under age 35, 40% have student loan debt. Unlike mortgages or
credit card debt, student loan debt is not easily discharged. Clearly, these
debts must be substantially dealt with before these potential homebuyers can
enter the market.
Our expectation of a gradual improvement in US housing notwithstanding our OSB
supply demand model (details follow) suggests OSB pricing will remain well above levels
seen over the past several years and well within a range where Ainsworth will show
solid profitability, in our view. For further details on our housing outlook please refer to
Raymond James & Associates recently published Spring 2013 Housing Quarterly dated
April 17, 2013.
Repair & Remodeling
Repair and reno demand much less volatile than residential construction – The repair
and reno segment held up significantly better during the housing downturn, falling from
a 2007 peak of 4.7 bln msf to a low of 3.6 bln msf before improving modestly to 3.8 bln
msf in 2012. Due primarily to the decline in demand from residential construction, it
went from 15% of total OSB consumption in 2005 to 25% in 2009 and has remained at
this level as of 2012. Based on FEA forecasts of this sector seeing strong gains in coming
years (details below), we expect OSB consumption by this end market will meet or
surpass previous peaks by 2014.
Strong gains in repair and reno spending expected in coming years – After languishing
at a relatively depressed $109-$110 bln average over 2008-2011, repair and reno
spending for 2012 recovered somewhat to $118 bln on the back of an improving
economy and recovering real estate market. While a marked improvement from recent
years, 2012 repair and reno spending was far below the ~$130 bln spent in 2007.
Looking ahead, we believe broad trends such as rising home sales, a high percentage of
distressed sales, aging home supply and large volumes of so called “shadow inventories”
will necessitate increased home repair and reno spending, positively impacting this
portion of the OSB market (see Exhibit 27). According to the Department of Housing
and Urban Development’s American Housing Survey, the median age of an owneroccupied home in the US was 34 years old as of 2009. The study also noted 70% of US
homes are more than 20 years old, while 40% are more than 40 years old and 29% were
built 40 to 70 years ago. The APA believes that, besides being less energy efficient,
these homes will require remodeling or replacement in the near future both as a result
of required maintenance and discretionary updating. Moreover, we believe a corollary
of the large number of shadow inventories in the US (homes that have been foreclosed
on but remain in bank hands) continue to fall into ever-worsening states of disrepair,
something we believe will further spur demand for building materials used in repair and
remodeling. We also highlight, with a significant proportion of US mortgages currently
in a negative equity position, we see many homeowners electing to “fix up” rather than
“move up.” Therefore, we concur with forecasts from FEA which suggest the repair and
reno sector will see healthy spending growth in coming years of 4%-5% rising from
$118.4 bln in 2012 to $124 bln by 2014 (see Exhibit 26).
Exhibit 26: Historical and Forecasted Repair and Reno Spending
FEA Forecast
135
US Residential Improvement Expenditures (blns $2005)
130
125
120
115
110
105
100
95
2008
2009
2010
2011
2012
2013
2014
Source: FEA
6,000
5,500
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Aug-07
Oct-07
Dec-07
Feb-08
Apr-08
Jun-08
Aug-08
Oct-08
Dec-08
Feb-09
Apr-09
Jun-09
Aug-09
Oct-09
Dec-09
Feb-10
Apr-10
Jun-10
Aug-10
Oct-10
Dec-10
Feb-11
Apr-11
Jun-11
Aug-11
Oct-11
Dec-11
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
# Homes/Mortgages in 000's
Exhibit 27: US “Shadow Inventories” (Repossessed, Foreclosed, and Seriously
Delinquent Mortgages)
REO
Seriously Delinquent
Foreclosure
Source: RealtyTrac, Hopenow, Mortgage Bankers Association
Furniture Production & Industrial/Light Commercial Applications
Industrial consumption also steady – Representing just 7% of total OSB consumption in
2005, industrial use of OSB has typically not been as significant of an end market for the
commodity. However, similar to repair and reno, its relative importance has increased
with it now representing 17% of total North American OSB consumption. While this
relative importance will likely decline as the residential construction segment improves,
FEA forecasts total industrial and furniture production indexes posting healthy growth in
2013-2015.
Healthy growth in industrial end uses expected – Supported by an improving US
economy both in terms of employment/GDP growth and pent up demand for
manufactured goods, FEA expects industrial and furniture production to grow at a 3%4% pace over the next two years. This growth rate would bring the industrial
production index back above the previous historical peak of 2007-2008 by 2013,
marking a significant improvement from recessionary lows of below 0.85 in 2009-2010
(see Exhibit 28). As for US furniture production, using 2007 as a base year, the furniture
index fell significantly to a low of 0.61 in December 2009 before rebounding modestly
and hovering around 0.70 for the majority of 2012. Looking ahead, FEA expects
improving US home sales (with accompanying furniture purchases) to lift the index at a
moderate pace to 0.71 and 0.74 in 2013 and 2014, respectively, again providing
increased demand for wood panels.
Exhibit 28: Industrial Construction and Furniture Indices
Z
FEA Forecast
Industrial & Furniture Production (SA., 2007 = 1.00)
1.10
1.05
1.00
0.95
0.90
0.85
0.80
0.75
0.70
0.65
0.60
2007
2008
2009
2010
Total Industrial
2011
2012
2013
2014
Furniture
Source: FEA
OSB Substitution for Plywood
First developed in the late 1970’s, the technology involved in both the production
methods of OSB and the end product improved significantly over time as the product
gained widespread acceptance. While some early doubters suggested OSB panels were
less durable and a lower quality product it is now widely accepted that the structural
performance and durability of OSB and plywood are equal. Therefore, as a more cost
effective direct substitute OSB continues to take a rising share of the structural wood
panel market – particularly in sheathing in housing construction. We note, OSB market
share has risen from roughly 50% in the mid to late 90’s to roughly 60% currently, and is
expected to approach 65% in coming years (see Exhibit 29) but, in general, the majority
of this substitution effect has already taken place with OSB the preferred product for
home builders and plywood transitioning to more of a niche product. In regions outside
North America where wood frame construction is widely used, such as Japan, OSB
maintains a much smaller market share, estimated at approximately 5%, something
Ainsworth views as an opportunity for growth going forward.
Exhibit 29: OSB vs. Plywood: Production Levels and OSB Market Share
FEA Forecast
66%
9.0
64%
8.0
62%
7.0
60%
6.0
58%
5.0
56%
4.0
54%
3.0
2.0
52%
1.0
50%
0.0
48%
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
panel production (bln msf)
10.0
OSB Production
Plywood Production
OSB Market Share (RT Axis)
Source: FEA
Precedent OSB Transactions
Referring to Exhibit 30 below, we note going back to 1999 OSB mills have changed
hands at an average of C$224/msf of capacity. Relative to this long-term average we
note Ainsworth paid a reasonable price to Grant Forest Products for the other 50% of
the High Level mill, whereas some of the company’s previous transactions were
undertaken at the 2004 peak of the market at multiples materially above the average.
Over time, greenfield OSB capacity has averaged roughly $325/msf and we expect that
new capacity today could be built at roughly $350/msf. However, given the still large
amounts of idled OSB capacity we would be surprised to see any new mills built and
would consider it more plausible that one of the large producers would acquire and
upgrade an existing facility
Exhibit 30: OSB Precedent Transactions
OSB Sector Precedent Transactions
Date
Buyer
Asset/Seller
Location
1999
MacMillan Bloedel
Eagle Forest Prod.
New Brunswick
1999
Louisiana Pacific
Forex
Quebec
Value
Capacity (mln fbm)
C$/mfbm
71
405
175
458
1640
279
1999
Groupe Forex
Panneax Chambord
Quebec
65
500
130
1999
MacMillan Bloedel
Saskfor
Saskatchewan
44
210
210
2002
Norbord
IP OSB Assets
US South
250
1155
216
2004
Ainsworth
Boise/Voyageur
Ontario
193
440
439
2004
Ainsworth
Potlatch
Minnesota
458
1350
339
2004
Tolko
Weyerhaeuser (Slave Lake)
BC
38
240
158
2004
Norbord
Meadwestvaco
Minnesota
36
220
164
2006
Tembec
Jolina
Quebec
85
250
339
2010
GP
Grant Forest Products
Ontario/Clardendon SC
430
2250
191
2011
Ainsworth
Grant Forest Products
50% of High Level
70
430
162
2012
Arbec
Weyerhaeuser
New Brunswick
47.5
430
Average
110
224
Appendix IV: Ainsworth Financial Statements
Exhibit 31: Ainsworth Income Statement (2010-2014E, $mln)
For the Fiscal Year Ending
2010 (Restated)
2011
2012
2013E
2014E
Revenue
Other Revenue
Total Revenue
329.5
329.5
293.3
293.3
409.1
409.1
566.0
566.0
716.1
716.1
Cost Of Goods Sold
Gross Profit
254.0
75.5
264.6
28.6
287.2
121.8
312.8
253.2
428.6
287.5
18.8
29.1
-
17.4
24.0
-
16.4
25.6
-
17.5
28.4
-
17.3
35.0
-
Other Operating Exp., Total
48.0
41.4
42.1
45.9
52.3
Operating Income
27.6
(12.8)
79.8
207.2
235.2
(52.6)
(49.8)
(50.8)
(27.6)
(25.0)
Net Currency Exchange Gains and Other Non-Operating Inc. (Exp.)
EBT Excl. Unusual Items
38.9
13.9
(15.8)
(78.4)
33.9
62.9
0.9
180.5
(0.8)
209.4
Other Non-Recurring Items
EBT Incl. Unusual Items
(0.5)
13.4
69.3
(9.1)
(28.3)
34.7
4.0
176.5
2.5
206.9
Income Tax Expense (Deferred + Current)
Earnings from Cont. Ops.
0.6
12.8
(16.7)
7.6
5.9
28.8
45.1
131.4
51.7
155.2
Earnings of Discontinued Ops.
Net Income
(0.9)
11.9
0.7
8.3
(0.4)
28.4
(0.2)
131.2
155.2
Adjusted EBITDA
53.7
12.5
106.7
235.6
270.2
EPS (f.d., from cont. ops.)
0.12
0.08
0.28
0.54
0.64
100.5
100.8
240.8
240.8
240.8
Filing Currency: CAD
Selling General & Admin Exp.
R & D Exp.
Depreciation & Amort.
Other Operating Expense/(Income)
Net Interest Expense
Total Shares Out. on Filing Date
Exhibit 32: Ainsworth Balance Sheet (2010-2014E, $mln)
For the fiscal year ending:
2010 (Restated)
2011
2012
2013E
2014E
67.6
59.4
127.0
57.7
57.7
106.8
106.8
255.9
255.9
414.6
414.6
Accounts Receivable
Other Receivables
Total Receivables
11.0
4.5
15.5
13.9
3.9
17.8
22.2
3.4
25.6
40.1
40.1
50.1
50.1
Inventory
Prepaid Exp.
Restricted Cash
Other Current Assets
Total Current Assets
39.4
6.6
188.5
36.4
6.6
4.9
0.5
123.8
38.1
5.3
5.6
181.4
58.6
4.2
4.4
363.2
64.4
4.2
4.4
537.7
543.2
648.8
628.7
627.5
612.5
30.6
762.2
13.7
786.3
25.1
835.2
32.1
1,022.8
32.1
1,182.3
10.6
22.3
1.3
15.0
49.2
8.8
4.9
1.5
13.6
28.8
11.5
0.1
6.3
2.1
19.2
39.2
46.3
6.3
1.9
0.4
55.0
50.1
6.3
1.9
0.4
58.9
485.6
10.4
27.2
3.7
576.3
518.3
13.1
31.2
4.8
596.2
355.1
17.0
32.3
6.3
449.9
349.9
17.0
77.7
6.7
506.4
337.9
17.0
90.2
6.7
510.7
411.0
1.4
(226.3)
186.0
411.5
1.5
(222.9)
190.1
582.6
1.8
(199.2)
385.3
582.6
1.7
(68.0)
516.4
582.6
1.7
87.2
671.6
Total Equity
186.0
190.1
385.3
516.4
671.6
Total Liabilities And Equity
762.2
786.3
835.2
1,022.8
1,182.3
ASSETS
Cash And Equivalents
Short Term Investments
Total Cash & ST Investments
Net Property, Plant & Equipment
Other Long-Term Assets, Investments & Intangibles
Total Assets
LIABILITIES
Accounts Payable
Accrued Exp.
Curr. Port. of LT Debt
Curr. Income Taxes Payable
Other Current Liabilities
Total Current Liabilities
Long-Term Debt
Pension & Other Post-Retire. Benefits
Def. Tax Liability, Non-Curr.
Other Non-Current Liabilities
Total Liabilities
Common Stock
Additional Paid In Capital
Retained Earnings
Total Common Equity
Exhibit 33: Ainsworth Cash Flow Statement (2010-2014E, $mln)
For the Fiscal Period Ending
2010
2011
2012
2013E
2014E
11.9
31.0
8.3
26.0
28.4
33.5
131.2
28.4
155.2
35.0
(Gain) Loss From Sale Of Assets
Asset Writedown & Restructuring Costs
Stock-Based Compensation
Net Cash From Discontinued Ops.
Other Operating Activities & Deferred Income Taxes
Change in Acc. Receivable
Change In Inventories
Change in Acc. Payable
Cash from Ops.
(0.5)
0.8
(25.2)
(1.0)
(0.2)
(4.5)
12.3
(1.5)
(70.9)
0.4
13.7
(2.6)
2.3
(2.7)
(27.0)
0.2
1.3
0.8
8.6
(7.3)
(1.6)
4.1
68.1
(0.01)
0.1
51.7
(14.5)
(20.0)
9.1
186.0
12.50
(10.0)
(5.8)
3.9
190.7
Capital Expenditures
Sale of Property, Plant, and Equipment
Cash Acquisitions
Divestitures
Invest. in Marketable & Equity Securt.
Net (Inc.) Dec. in Loans Originated/Sold
Other Investing Activities
Cash from Investing
(15.5)
0.6
2.2
(0.2)
(12.9)
(7.8)
2.0
(20.0)
5.7
(20.2)
(6.0)
0.3
(0.7)
(6.3)
(27.6)
1.01
1.23
(25.4)
(20.00)
(20.0)
Short Term Debt Issued
Long-Term Debt Issued
Total Debt Issued
Short Term Debt Repaid
Long-Term Debt Repaid
Total Debt Repaid
(24.0)
(24.0)
14.1
14.1
(25.7)
(25.7)
348.1
348.1
(523.1)
(523.1)
(12.7)
(12.7)
(12.0)
(12.0)
Issuance of Common Stock
Other Financing Activities
Cash from Financing
0.7
(23.3)
0.3
(11.3)
175.1
(12.1)
(12.0)
(0.1)
(12.8)
(12.0)
Foreign Exchange Rate Adj.
Net Change in Cash
(0.5)
(24.5)
0
(58.5)
(0.7)
49.1
1.35
149.2
158.7
Net Income
Total Depreciation & Amort.
Company Citations
Company Name
BlackRock, Inc.
Boise Inc.
Brookfield Asset Management Inc.
CAE Inc.
Canadian Imperial Bank of Commerce
Canfor Corp.
Canfor Pulp Products Inc.
Conifex Timber Inc.
Interfor
Ivanhoe Energy Inc.
Loblaw Companies Ltd.
Louisiana Pacific
MeadWestvaco Corp.
National Bank
Norbord Inc.
Potlatch Corporation
Sonde Resources Corp.
SouthGobi Resources Ltd.
TELUS Corp.
Tembec Inc.
Textron Inc.
The Toronto-Dominion Bank
Vicwest Inc.
Wajax Corp.
West Fraser Timber
Western Forest Products Inc.
Weyerhaeuser Company
Zillow, Inc.
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C$
C$
US$
US$
33.35
78.43
1.30
29.66
56.34
RJ Rating
NC
NC
NC
2
NC
2
2
1
2
NC
R
NC
NC
NC
3
2
NC
NC
3
NC
NC
NC
NC
3
2
3
1
3
RJ Entity
RJ LTD.
RJ LTD.
RJ LTD.
RJ LTD.
RJ LTD.
RJ LTD.
RJ LTD.
RJ & Associates
RJ & Associates
RJ LTD.
RJ LTD.
RJ LTD.
RJ & Associates
RJ & Associates
Notes: Prices are as of the most recent close on the indicated exchange and may not be in US$. See Disclosure section for
rating definitions. Stocks that do not trade on a U.S. national exchange may not be registered for sale in all U.S. states. NC=not
covered.
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Ratings and Definitions
Raymond James Ltd. (Canada) definitions
Strong Buy (SB1) The stock is expected to appreciate and produce a total return of at least 15% and outperform the
S&P/TSX Composite Index over the next six months. Outperform (MO2) The stock is expected to appreciate and
outperform the S&P/TSX Composite Index over the next twelve months. Market Perform (MP3) The stock is expected to
perform generally in line with the S&P/TSX Composite Index over the next twelve months and is potentially a source of
funds for more highly rated securities. Underperform (MU4) The stock is expected to underperform the S&P/TSX
Composite Index or its sector over the next six to twelve months and should be sold.
Raymond James & Associates (U.S.) definitions
Strong Buy (SB1) Expected to appreciate, produce a total return of at least 15%, and outperform the S&P 500 over the next
six to 12 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, a total return of at
least 15% is expected to be realized over the next 12 months. Outperform (MO2) Expected to appreciate and outperform
the S&P 500 over the next 12-18 months. For higher yielding and more conservative equities, such as REITs and certain
MLPs, an Outperform rating is used for securities where we are comfortable with the relative safety of the dividend and
expect a total return modestly exceeding the dividend yield over the next 12-18 months. Market Perform (MP3) Expected
to perform generally in line with the S&P 500 over the next 12 months. Underperform (MU4) Expected to underperform
the S&P 500 or its sector over the next six to 12 months and should be sold. Suspended (S) The rating and price target have
been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply
with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing
investment banking services to the company. The previous rating and price target are no longer in effect for this security
and should not be relied upon.
Raymond James Latin American rating definitions
Strong Buy (SB1) Expected to appreciate and produce a total return of at least 25.0% over the next twelve months.
Outperform (MO2) Expected to appreciate and produce a total return of between 15.0% and 25.0% over the next twelve
months. Market Perform (MP3) Expected to perform in line with the underlying country index. Underperform (MU4)
Expected to underperform the underlying country index. Suspended (S) The rating and price target have been suspended
temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable
regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking
services to the company. The previous rating and price target are no longer in effect for this security and should not be
relied upon.
Raymond James Euro Equities, SAS rating definitions
Strong Buy (1) Expected to appreciate, produce a total return of at least 15%, and outperform the Stoxx 600 over the next 6
to 12 months. Outperform (2) Expected to appreciate and outperform the Stoxx 600 over the next 12 months. Market
Perform (3) Expected to perform generally in line with the Stoxx 600 over the next 12 months. Underperform (4) Expected
to underperform the Stoxx 600 or its sector over the next 6 to 12 months. Suspended (S) The rating and target price have
been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply
with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing
investment banking services to the company. The previous rating and target price are no longer in effect for this security
and should not be relied upon.
In transacting in any security, investors should be aware that other securities in the Raymond James research coverage
universe might carry a higher or lower rating. Investors should feel free to contact their Financial Advisor to discuss the
merits of other available investments.
Suitability Categories (SR)
Total Return (TR) Lower risk equities possessing dividend yields above that of the S&P 500 and greater stability of principal.
Growth (G) Low to average risk equities with sound financials, more consistent earnings growth, at least a small dividend,
and the potential for long-term price appreciation.
Aggressive Growth (AG) Medium or higher risk equities of companies in fast growing and competitive industries, with less
predictable earnings and acceptable, but possibly more leveraged balance sheets.
High Risk (HR) Companies with less predictable earnings (or losses), rapidly changing market dynamics, financial and
competitive issues, higher price volatility (beta), and risk of principal.
Venture Risk (VR) Companies with a short or unprofitable operating history, limited or less predictable revenues, very high
risk associated with success, and a substantial risk of principal.
Rating Distributions
Coverage Universe Rating Distribution
Investment Banking Distribution
RJL
RJA
RJ LatAm
RJEE
RJL
RJA
RJ LatAm
RJEE
Strong Buy and Outperform (Buy)
65%
51%
32%
41%
26%
21%
0%
0%
Market Perform (Hold)
34%
43%
64%
39%
26%
9%
0%
0%
Underperform (Sell)
1%
6%
4%
20%
0%
2%
0%
0%
Raymond James Relationship Disclosures
Raymond James Ltd. or its affiliates expects to receive or intends to seek compensation for investment banking services
from all companies under research coverage within the next three months.
Company Name
Disclosure
Raymond James Ltd - the analyst and/or associate has viewed the material operations of
Brookfield Asset Management Raymond James Ltd. has managed or co-managed a public offering of securities within the
Inc.
last 12 months with respect to Brookfield Asset Management Inc.
Raymond James Ltd. has provided investment banking services within the last 12 months
with respect to Brookfield Asset Management Inc.
Raymond James Ltd. has received compensation for investment banking services within the
last 12 months with respect to Brookfield Asset Management Inc.
CAE Inc.
CAE Inc.
Raymond James Ltd. makes a market in the securities of CAE Inc.
Canfor Corp.
Canfor Corp.
Raymond James Ltd - within the last 12 months, Canfor Corp. has paid for all or a material
portion of the travel costs associated with a site visit by the analyst and/or associate.
Raymond James Ltd. makes a market in the securities of Canfor Corp.
Company Name
Disclosure
Conifex Timber Inc.
Conifex Timber Inc.
Raymond James Ltd - within the last 12 months, Conifex Timber Inc. has paid for all or a
material portion of the travel costs associated with a site visit by the analyst and/or
associate.
Raymond James Ltd. has managed or co-managed a public offering of securities within the
last 12 months with respect to Conifex Timber Inc.
with respect to Conifex Timber Inc.
last 12 months with respect to Conifex Timber Inc.
Interfor
Interfor.
Norbord Inc.
Norbord Inc.
last 12 months with respect to Norbord Inc.
with respect to Norbord Inc.
last 12 months with respect to Norbord Inc.
Potlatch Corporation
Raymond James & Associates makes a market in shares of PCH.
Raymond James & Associates received non-investment banking securities-related
compensation from PCH within the past 12 months.
Wajax Corp.
Wajax Corp.
West Fraser Timber
West Fraser Timber.
Raymond James Ltd. has provided non-securities-related services within the last 12 months
with respect to West Fraser Timber.
last 12 months with respect to Western Forest Products Inc.
with respect to Western Forest Products Inc.
Zillow, Inc.
Raymond James & Associates makes a market in shares of Z.
Stock Charts, Target Prices, and Valuation Methodologies
Valuation Methodology: The Raymond James methodology for assigning ratings and target prices includes a number of
qualitative and quantitative factors including an assessment of industry size, structure, business trends and overall
attractiveness; management effectiveness; competition; visibility; financial condition, and expected total return, among
other factors. These factors are subject to change depending on overall economic conditions or industry- or companyspecific occurrences.
Target Prices: The information below indicates our target price and rating changes for ANS stock over the past three years.
Valuation Methodology: Our valuation methodology for Ainsworth includes a comparison of EV/EBITDA multiple relative to
appropriate industry competitors.
The information below indicates target price and rating changes for other subject companies included in this research.
Valuation Methodology: We value Conifex on a comparative basis to peer group average multiples.
Valuation Methodology: We value Canfor on a comparative basis to historical multiples.
Valuation Methodology: We value Interfor on a comparative basis to historical multiples.
Valuation Methodology: We value Norbord on a comparative basis to historical multiples.
Valuation Methodology: We value West Fraser Timber on a comparative basis to historical multiples.
Valuation Methodology: We value Western Forest Products based on its historical mid-cycle EV/EBITDA trading range and relative
to comparables.
Risk Factors
General Risk Factors: Following are some general risk factors that pertain to the projected target prices included on
Raymond James research: (1) Industry fundamentals with respect to customer demand or product / service pricing could
change and adversely impact expected revenues and earnings; (2) Issues relating to major competitors or market shares or
new product expectations could change investor attitudes toward the sector or this stock; (3) Unforeseen developments
with respect to the management, financial condition or accounting policies or practices could alter the prospective
valuation.
Risks - Ainsworth Lumber Co. Ltd.
Currency Risk – As OSB prices are denominated in US dollars whereas Ainsworth’s costs are primarily incurred in Canadian
dollars, the company is exposed to the risk of the C$ appreciating relative to the US$, resulting in reduced margins in
Canadian dollar terms (Ainsworth’s reporting currency).
Commodity Price Risk – The global forest products industry is highly cyclical and prices for Ainsworth’s key product, OSB
panels, may vary materially from our estimates and negatively impact the company’s results.
Environmental Issues/Government Regulation – Ainsworth is subject to regulation in terms of both government regulations
relating to forest management practices, as well as health and safety requirements. Should any of these regulations change
it could result in increased costs to Ainsworth to maintain compliance or restrict access to wood fibre. In addition, the
company is also subject to general and industry specific environmental laws which could adversely affect the business.
Fibre Costs Availability and Other Input Costs – Wood fibre is one of Ainsworth’s key inputs and the cost of it is materially
impacted by costs including logging/hauling, stumpage rates, fuel, road building, and reforestation obligations. Each of
these costs could vary materially from our estimates and negatively impact Ainsworth’s results. In Canada, wood fibre is
sourced primarily by agreements with provincial governments which are granted for various terms from five to twenty-five
years and are generally subject to regular renewals every five years. Difficulties renewing these agreements could
negatively impact the company’s business.
Another key input in OSB is resin, which can also fluctuate materially and could also negatively impact Ainsworth’s results.
Resin costs are influenced by changes in the prices of petroleum products, as well as demand for and availability of resin
products. Rising petroleum prices could also reduce the company’s profitability.
Maintenance Costs/Facility Disruptions – From time to time Ainsworth must carry out maintenance at its facilities which
could potentially last longer or cost more than we currently estimate. In addition, the company’s equipment could
malfunction and/or require unexpected repairs which could negatively impact the company’s operations and result in
higher than expected maintenance costs.
Inclement Weather/Forest Fires – There exists the potential for inclement weather in the areas where Ainsworth operates
to hinder the company’s ability to harvest and/or transport logs during key harvesting seasons, potentially resulting in
reduced operating rates. In addition, forest fires are common during the summer in certain areas of Canada and could
impact the company’s timber assets and/or logging operations.
High Level Mill and other Expansion Initiatives Implementation Risk – As Ainsworth proceeds with the ramp up of the High
Level mill there are issues such as cost overruns, delays, and other unexpected implementation issues which could
negatively impact the project’s expected returns. The company will face similar risks when and if the second line Grande
Prairie is completed and restarted.
Labour Agreements – Ainsworth’s Barwick and 100 Mile House mills are unionized. During 2010, new union contracts were
negotiated for 100 Mile House, due to expire on June 30, 2013, and Barwick, due to expire on July 31, 2013. The company
could experience strikes or work interruptions if it is unable to negotiate acceptable contracts with its various trade unions
upon expiry.
Risks - Conifex Timber Inc.
i) Lumber prices are cyclical, slower than expected economic growth or higher mortgage rates could reduce our price
forecasts. ii) As sales are denominated in U.S. dollars, a depreciation of the U.S. dollar could negatively affect earnings. iii)
Conifex’s logging operations are primarily on Crown land. Government policy changes could negatively affect operating
margins, iv) Forest product markets are global in nature issues affecting transportation or market access could impact
earnings v) Conifex’s bio-energy project is yet to be completed and unforeseen delays in the implementation of the project
could also negatively impact our earnings estimates.
Risks - Canfor Corp.
Forest product prices are cyclical, worse than expected economic conditions could reduce our price forecasts. ii) As sales
are typically denominated in U.S. dollars, a depreciation of the U.S. dollar could negatively affect earnings. iii) Canfor
operates on Crown land. Government policy changes could negatively affect operating margins. v) Forest product markets
are global in nature issues affecting transportation or market access could impact earnings. vi) Extreme weather conditions
or fires could impact harvesting plans and hence earnings.
Risks - Interfor
i) Lumber prices are cyclical, slower than expected economic growth or higher mortgage rates could reduce our price
forecasts. ii) As sales are denominated in U.S. dollars, a depreciation of the U.S. dollar could negatively affect earnings. iii)
Interfor’s logging operations are primarily on Crown land. Government policy changes could negatively affect operating
margins, iv) Forest product markets are global in nature issues affecting transportation or market access could impact
earnings.
Risks - Norbord
i) Wood based panel products are highly cyclical, slower than expected residential construction rates, economic growth or
plywood substitution rates could reduce OSB demand, pricing and earnings. ii) Additional announced capacity increases or a
faster ramp up of existing projects could reduce our commodity price forecasts and earnings. iii) A reduction in the
availability or an increase in price of raw materials such as fibre (e.g., related to market conditions or weather) and resin
(e.g., related to oil prices) could negatively affect operating margins iv) Forest product markets are global in nature, trade
issues affecting market access could impact earnings.
Risks - West Fraser Timber
Forest product prices are cyclical, worse than expected economic conditions could reduce our price forecasts. ii) As sales
are typically denominated in U.S. dollars, a depreciation of the U.S. dollar could negatively affect earnings. iii) West Fraser
operates on Crown land. Government policy changes could negatively affect operating margins. v) Forest product markets
are global in nature issues affecting transportation or market access could impact earnings. vi) Extreme weather conditions
or fires could impact harvesting plans and hence earnings.
Risks - Western Forest Products Inc.
i) Lumber prices are cyclical, lower than expected pricing could reduce Western’s earnings forecasts. ii) As sales for many of
Western’s products are denominated in U.S. dollars, a depreciation of the U.S. dollar could negatively affect earnings. iii)
Western’s logging operations are primarily on Crown land. Government policy changes could negatively affect operating
margins, iv) Changes to government policies regarding log exports could also negatively affect Western’s financial results v)
Forest product markets are global in nature issues affecting transportation or market access could impact earnings vi)
Adverse economic developments in Western’s key regional markets (USA, Japan, China) could have a negative impact on
Western’s results, vii) Fires or other natural disasters could impact Western’s log harvesting or processing operations.
Additional Risk and Disclosure information, as well as more information on the Raymond James rating system and suitability
categories, is available for Raymond James at rjcapitalmarkets.com/Disclosures/index and for Raymond James Limited at
www.raymondjames.ca/researchdisclosures.
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For clients in the United States:
For clients in the United States: Any foreign securities discussed in this report are generally not eligible for sale in the U.S.
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represent a solicitation for the purchase or sale of a security in any state where such a solicitation would be illegal.
Investing in securities of issuers organized outside of the U.S., including ADRs, may entail certain risks. The securities of
non-U.S. issuers may not be registered with, nor be subject to the reporting requirements of, the U.S. Securities and
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Please ask your Financial Advisor for additional details and to determine if a particular security is eligible for solicitation in
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Raymond James Ltd. is not a U.S. broker-dealer and therefore is not governed by U.S. laws, rules or regulations applicable
to U.S. broker-dealers. Consequently, the persons responsible for the content of this publication are not licensed in the U.S.
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Any U.S. Institutional Investor wishing to effect trades in any security should contact Raymond James (USA) Ltd., a U.S.
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RJL is a member of the Canadian Investor Protection Fund. ©2013 Raymond James Ltd.
EQUITY RESEARCH
HEAD OF EQUITY RESEARCH
DARYL SWETLISHOFF, CFA
RAYMOND JAMES LTD. CANADIAN INSTITUTIONAL EQUITY TEAM WWW.RAYMONDJAMES.CA
INSTITUTIONAL EQUITY SALES
604.659.8246
CONSUMER
CONSUMER & RETAIL
KENRIC TYGHE, MBA
PARISA NAGHIBI, MBA (ASSOCIATE)
HEAD OF SALES
MIKE WESTCOTT
MICHELLE MARGUET (MARKETING COORDINATOR)
TORONTO (CAN 1.888.601.6105 | USA 1.800.290.4847)
416.777.7188
416.777.7060
LAURA ARRELL (U.S. EQUITIES)
SEAN BOYLE
JEFF CARRUTHERS, CFA
RICHARD EAKINS
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DAVE MACLENNAN
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DOUG OWEN
NICOLE SVEC-GRIFFIS, CFA (U.S. EQUITIES)
NEIL WEBER
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ENERGY
OIL & GAS ENERGY SERVICES, HEAD OF ENERGY RESEARCH
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INDUSTRIAL & TRANSPORTATION
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604.659.8208
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MINING
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BASE METALS & MINERALS | IRON ORE
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BASE METALS & MINERALS | PLATINUM GROUP METALS
ALEX TERENTIEW, MBA, P.GEO
ROSS YAKOVLEV, CA, MBA (ASSOCIATE)
PRECIOUS METALS
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BRIAN MARTIN (ASSOCIATE)
URANIUM
DAVID SADOWSKI
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FOREST PRODUCTS
FOREST PRODUCTS
DARYL SWETLISHOFF, CFA
DAVID QUEZADA, CFA (ASSOCIATE)
604.659.8246
604.659.8257
727.567.1756
416.777.7189
TECHNOLOGY & COMMUNICATIONS
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EQUITY RESEARCH PUBLISHING
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INDER GILL (RESEARCH EDITOR)
KATE MAJOR (RESEARCH PRINCIPAL | EDITOR)
CHRISTINE MARTE (RESEARCH EDITOR)
ASHLEY RAMSAY (SUPERVISORY ANALYST |EDITOR)
416.777.4920
416.777.4927
416.777.4929
416.777.4926
416.777.4930
416.777.4934
416.777.4945
416.777.4925
416.777.4942
416.777.4931
416.777.4915
416.777.4928
VANCOUVER (1.800.667.2899)
SCOT ATKINSON, CFA
DOUG BELL
TERRI MCEWAN (ASSISTANT)
604.659.8225
604.659.8220
604.659.8228
MONTREAL (514.350.4450 | 1.866.350.4455)
JOHN HART
DAVID MAISLIN, CFA
TANYA HATCHER (ASSISTANT)
514.350.4462
514.350.4460
514.350.4458
LONDON
JON DE VOS
ADAM WOOD
0.207.426.5632
0.207.426.5612
INSTITUTIONAL EQUITY TRADING
CO-HEAD OF TRADING
BOB MCDONALD, CFA
ANDREW FOOTE, CFA
TORONTO (CANADA 1.888.601.6105 | USA 1.800.290.4847)
PAM BANKS
ANTHONY COX
OLIVER HERBST
ANDY HERRMANN
ERIC MUNRO, CFA
JAMES SHIELDS
BOB STANDING
PETER MASON (ASSISTANT)
VANCOUVER (1.800.667.2899)
NAV CHEEMA
FRASER JEFFERSON
DEREK ORAM
MONTREAL (514.350.4450 | 1.866.350.4455)
JOE CLEMENT
PATRICK SANCHE
604.659.8222
416.777.4924
416.777.4923
416.777.4922
416.777.4947
416.777.4937
416.777.4983
416.777.4941
416.777.4921
416.777.7195
604.659.8224
604.659.8218
604.659.8223
514.350.4470
514.350.4465
INSTITUTIONAL EQUITY OFFICES
REAL ESTATE
REAL ESTATE & REITS
KEN AVALOS, MBA
JOHANN RODRIGUES (ASSOCIATE)
416.777.4935
416.777.4951
416.777.4918
416.777.6414
Calgary
Suite 4250
525 8th Avenue SW
Calgary, AB T2P 1G1
403.509.0500
Montreal
Vancouver
Suite 3000
Suite 2100
1800 McGill College
925 West Georgia Street
Montreal, PQ H3A 3J6
Vancouver, BC V6C 3L2
514.350.4450
604.659.8200
Toll Free: 1.866.350.4455
Toll Free: 1.800.667.2899
Toronto
International Headquarters
Suite 5400, Scotia Plaza 40 King Street West The Raymond James Financial Center
Toronto, ON M5H 3Y2
880 Carillon Parkway
416.777.4900
St.Petersburg, FL
Toll Free Canada: .888.601.6105
USA 33716
Toll Free USA: 1.800.290.4847
727.567.1000
403.509.0509
604.659.8210
416.777.4948
604.659.8202
416.777.7173
604.659.8200
604.659.8226

Canada Research Ainsworth Lumber Co. Ltd.

Transcription

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