Close

Containerboard Stocks Could Revalue Up to 100% Under MLP Structures, Perry Capital Says (IP) (KS) (RKT)

July 24, 2014 5:57 PM EDT

Stocks in the paper and packaging industry were on fire Thursday as traders reacted to a report from noted hedge fund Perry Capital which laid out a bullish case for companies in the industry that pursue Master Limited Partnership (MLP) treatment.

Despite the 4-10% moves higher today in stocks like International Paper (NYSE: IP), KapStone Paper and Packaging (NYSE: KS), RockTenn (NYSE: RKT), and Packaging Corp. of America (NYSE: PKG), plenty of upside could still exist. Perry Capital believes the MLP opportunity could revalue the entire containerboard industry by 50-100%, according to sources that have seen the report.

Confirming their thesis that domestic virgin containerboard mills would qualify for MLP treatment, Perry Capital commissioned an analysis by PricewaterhouseCoopers (PwC). "PwC concluded that domestic virgin containerboard mills using less than 25% recycled fiber, based on annual input weight, should be MLP-eligible and that such assets could be contributed to an MLP on a tax-efficient basis," the report highlighted.

Perry Capital's said a sum-of-the-parts value for each stock could benefit by a 3-5x increase in EBITDA multiple and a corresponding 300-500 basis point decrease in free cash flow yield. The report said this could translate into 50-100% share price appreciation across the industry.

Despite the massive MLP opportunity, to date none of the containerboard producers has requested a private letter ruling from the IRS.

Looking at the MLP valuation benefit on select stocks in the industry, Perry Capital highlighted:

International Paper (NYSE: IP): Assuming an 8% MLP “no growth” terminal yield at the end of the “drop-down” period, a 6x parent company EBITDA multiple and $5 per share in IDR value, the sum-of-the-parts value for IP is $75 per share, or 50% share price appreciation relative to the July 11, 2014, closing share price ($50.07 per share).

KapStone Paper and Packaging (NYSE: KS), RockTenn (NYSE: RKT): Assuming a 7% MLP terminal yield (reflecting a very modest expectation for future acquisition-led growth beyond the “drop-down” period), a 6x parent company EBITDA multiple and $10/$5 per share in IDR value for RKT/KS, the sum-of-the-parts value for RKT is $177 per share (76% share price appreciation) and KS is $58 per share (98% share price appreciation).



Serious News for Serious Traders! Try StreetInsider.com Premium Free!

You May Also Be Interested In





Related Categories

Hedge Funds, Insiders' Blog, Rumors, Trader Talk

Related Entities

Hedge Funds, Perry Capital, Definitive Agreement